Gold Surge Bodes Ill for Economy

The recent increase in gold prices suggest investors are increasingly worried the Federal Reserve may soon back off its current policy of quantitative easing in which it has bought billions of dollars of U.S. treasury debt and mortgage backed securities over the past few years.

In an article published Monday, Tyler Durden of ZeroHedge.com noted investors last week covered an enormous number of options contracts going short on gold futures prices, 23,518 futures contracts in total, suggesting a short-squeeze on gold is starting to solidify.

Short positions on gold futures contracts involve bets an investor makes that the price of gold will drop in the future. If the price of gold does not drop as anticipated, the investor owning a short contract must take a loss by purchasing gold at current prices to close out the contract on the expiration date.

When gold prices increase, investors owning gold futures short contracts risk losing money on the bad bet that the price of gold would have declined between the date the contract was purchased and the expiration date of the contract.

Durden noted the covering of gold shorts occurred last week at the fastest pace seen in the past 13 years.

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