Is this gold price jump the turning point?

China’s shock currency devaluation that sent ripples through commodity dependent economies last week sparked the rally, while Fed minutes released on Thursday that indicated a rate hike is less likely in September led to a sell-off in the dollar,  increasing jitters on currency and stock markets.

The dollar remains 17.5% higher against major world currencies and gold’s resurgence may have more to do with recent developments on the New York Comex market which has moved into uncharted territory.

Last week large gold futures investors such as hedge funds, referred to as “managed money”, continued to hold near record short positions– bets that gold could be bought cheaper in the future – and added only slightly to  longs.

According to the Commodity Futures Trading Commission’s weekly Commitment of Traders data speculators’ short positions  was down slightly to more than 11.4 million ounces (323 tonnes), while longs grew by less than 600,000 ounces.

On a net basis hedge funds remain short of the metal, a position entered into during the week to July 21 – the first time since at least 2006, when the data was first being tracked.

Any sustained move higher could see a scramble for gold on futures markets as traders cover short positions, but analysts are reluctant to call it a decisive turning point for the metal.

Ross Norman of Sharps Pixley, a large London bullion dealer, says apart from the record shorts, the strong buying of gold options with a strike price of $1,200 “clearly suggests some players see considerable upside from here.”

Other factors are pushing gold higher this week.

The market is in backwardation and spot gold is trading higher than gold for delivery in the future which suggests there is real tightness in the physical market.

“Backwardation is a rare and un-natural phenomenon in gold and certainly indicates something is afoot of a bullish nature,” says Norman, the London Bullion Market Association most accurate annual forecaster coming in as the outright winner five times and a runner up four times.

Sharps Pixley is owned by Germany’s Degussa, Europe’s top precious metals trader which revealed this week that demand for bars in Germany, the world’s third largest market after India and China and twice the size of the US, is up 50% compared to last year.

Norman does however suggest “cautious optimism”:

“Gold prices have been horrifically elastic these last 3 years and “momentum fade” has deeply eroded the confidence of the most die-hard bull.

“We don’t yet have a bull market in place in our view but a figure above the $1240 will certainly give many renewed confidence – which could potentially be self-reinforcing, just as was between 2000 and 2008 when the market clipped along at a 12% year on year gain well before any of us had heard the words “sub-prime” even.”

Picture of gold mannequins from Dali-Theatre Museum in Barcelona by Chirag D Shah.