Hedge funds raised bets on a gold rally before prices capped the biggest two-week gain in 20 months as Federal Reserve Chairman Ben S. Bernanke damped speculation that a cut in stimulus is imminent.

Speculators increased their net-long position by 56 percent to 55,535 futures and options by July 16, the highest since June 4, U.S. Commodity Futures Trading Commission data show. Short contracts fell the most since November after reaching a record the previous week. Net-bullish wagers across 18 U.S.-traded commodities jumped 28 percent, the biggest gain since March.

Gold surged 6.7 percent in two weeks, the most since November 2011, as Bernanke signaled that decreases to bond purchases aren't imminent. It's “way too early to make any judgment” as to whether the Fed will start winding down its stimulus program in September, he said while testifying before the Senate July 18. Bullion fell into a bear market in April as some investors lost faith in the metal as store of value.

“We are seeing some support for gold as Bernanke's statements tell us that the Fed wants to see a visible improvement in economic conditions before they begin tapering,” said Michael Cuggino, who manages $12 billion of assets at Permanent Portfolio Family of Funds Inc. in San Francisco. “The longer-term reasons for owning gold, like capital preservation, remain as easy money will continue to flow into the system.”

Eoin Treacy's view The above headline highlights just how oversold gold had become relative to the trend mean and that a $140 rally from a low of $1180 is more substantial in percentage terms than a larger rally posted in April from a higher level. As short covering persists and the deeply oversold condition is unwound, the $1400 area is likely to come into sharper focus.

This represents the medium-term progression of lower rally highs and is likely to coincide with the region of the 200-day MA. A sustained move above both these levels would bolster the view that gold has reached a medium-term low. The most likely scenario following such a steep decline is that once short covering has run its course, a process of base building will take place. If gold has found a medium-term low it will find support above the lows near $1180 on the next significant pullback.

The NYSE Arca Gold BUGS Index has fallen to its lowest level relative to gold since 2000 but the ratio has been losing downward momentum this month. A sustained move above 0.2 would break the progression of lower rally highs and suggest a return to outperformance by gold mining shares is underway.

In absolute terms, the Gold BUGS Index fell from a peak above 600 in 2011 to test the 200 area by late June and is currently unwinding its deep oversold condition. Miners have spent a great deal of money exploiting progressively less lucrative ore grades so that the cost of production has trended higher over the last decade. With the decline in gold prices the potential for some shuttering of production should help to cushion the decline in gold prices.

Over the medium-term, the powerful allure of gold as a store of wealth may face competition from major central banks eventually removing the extraordinary monetary measures introduced since the credit crisis.