Comex may see gold liquidation

Liquidation of long positions is likely on COMEX, the New York Mercantile Exchange's commodity division, if spot gold prices in the overseas markets remain soft next week, according to Kamal Naqvi, precious metals analyst at Barclays Capital.

In a research note, Naqvi pointed out that the current level of net long futures and options positions, as per the latest COMEX Commitment of Traders report, was up by over 33,000 contracts to around 111,000 contracts. Also, it was the highest level since April 2004.

According to Naqvi, gold has not been able to break out convincingly above the $410 an ounce mark, despite many positive factors.

These factors include the current high-level long positions, support lent by a strengthening euro against U.S. dollar (above $1.2150 per euro), terror concerns in Israel and Russia, and also fears of possible terror attacks during the ongoing Republican Convention in the United States.

Also, gold has risen modestly on news reports Monday that that Sons of Gwalia, Australia's second biggest gold producer, has fallen into the hands of administrators due to a Australian $348 million hedge book liability on identifying a "serious deterioration" in the status of its gold reserves.

This was unlike the situation in 1999, when on the news of hedge book problems at Ashanti Goldfields, the gold prices had rocketed.

According to Naqvi, for gold prices to hold firm, one of the major mining companies needs to de-hedge its positions. For mining firms, de-hedging in gold involves reversing the sold or short futures positions by buying futures or options.

De-hedging has a positive impact on spot prices.