Gold extends gains on QE outlook

Gold rose for a third straight day on Monday, extending last weeks third consecutive gain amid expectations the Federal Reserve will hold back Quantitative Easing tapering, while surging oil prices might spur inflation.

On the Comex division of the New York Mercantile Exchange, gold futures for August delivery traded at $1 314.75 at 9:45 GMT, up 1.69% on the day. Prices held in range between days high of $1 322.05, the highest since June 20, and low at $1 295.45 per troy ounce. The precious metal surged the past two days, extending last weeks gain to 1.52% after advancing almost 6% during the preceding two.

Gold was supported last week as Fed Chairman Ben Bernanke reiterated his preceding week’s statement at his two-day testimony to Congress on Wednesday and Thursday. Bernanke reinforced Fed’s view that Quantitative Easing is still expected to be tapered within the year and brought to an end by mid-2014, if the requirements are fulfilled. However, the Fed chief stated the U.S. economy currently needs Fed’s accommodative monetary policy in the foreseeable future and it can even be accelerated, if recovery slows its pace.

This caused the dollar to plunge, thus supporting dollar-denominated commodities. The dollar index, which tracks the greenbacks performance against six major counterparts, plunged 0.2% on Friday, extending last weeks decline to 0.45% after falling 1.87% the preceding week. On Monday, the U.S. currency gauge for September settlement traded at 82.57 at 9:20 GMT, down 0.19% on the day. Prices held in range between days high and low of 82.84 and 82.49 respectively.

The dollar trades inversely to dollar-priced commodities. Strengthening of the currency makes dollar-denominated raw materials more expensive for foreign currency holders, reducing their appeal as an alternative investment.

Lv Jie, an analyst at Cinda Futures Co., said by phone for Bloomberg: “Investor sentiment toward gold seems to be turning more positive after Bernanke’s comments last week. We’re probably going to see more short-covering in the near term as the U.S. dollar gets sold off.”

Gold was also supported as rising oil prices in the U.S. are expected to boost the outlook for inflation while gold is used mainly as a hedging strategy against rising inflation. According to U.S. Commodity Futures Trading Commission data, speculators increased their net long position 56 percent to 55 535 futures and options as of July 16, the highest since June 4.

“As oil prices rise, especially in the U.S., inflation, which hasnt been an issue and a reason gold is lower this year, may start to pick up,” Lv said. “Any move to stem a slowdown in China may spur physical demand. At the end of the day, whether or not Chinese investors will buy is determined by whether they think prices will go higher.”

According to a Bloomberg survey last week, traders remained bullish for a fourth week, the longest run since April. Out of twenty-nine analysts surveyed, fifteen were bullish, nine expected prices to fall this week and five were neutral. While physical demand in India, last year’s top consumer, declined as the country curbed gold imports due to a record-high current account deficit, signs of strengthening demand from China to Japan occurred, Barclays Plc wrote in a July 15 report.

Elsewhere on the precious metals market, silver and platinum advanced, while palladium marked a minor daily loss. Silver for September delivery traded at $19.868 an ounce at 9:42 GMT, up 2.10% on the day. Prices held in range between days high and low of $20.013 and $19.508 an ounce respectively. Platinum October futures stood at $1 434.45 per ounce, up 0.23% on the day. The metal varied between $1 443.15 and $1 430.50. Meanwhile, palladium for September delivery traded at $749.10 an ounce at 9:44 GMT, down 0.09%. Prices ranged between days high and low of $751.20 and $747.00 an ounce respectively.