Gold Prices Immune to Dollar Effect will Trigger a Mega Short Covering Rally
Gold is back under the spotlight because of the renewed appetite amidst traders. This is primarily because of the rising geopolitical tensions and worries over the slowing global economic growth. The gold price traded near a two-and-a-half-month peak last week and is at $1,227 at the time of writing. Year to date, the price is down nearly 5.18%.
At the start of the year, gold was trading near $1,350 and hit the highest point of $1,366 on January 25th, 2018. Not many in the street were expecting the Fed to be aggressive with their monetary policy. However, the strength in the economic data and the robust growth in the U.S. economy made the Fed to fine-tune their monetary policy. The hawkish stance towards their monetary policy pushed the dollar index higher and this triggered the sell-off in gold.
In other words, since January the price of gold has been out of luck and we have seen a clear downward trend. On August 16th, 2018, the yellow metal made a low of $1,160 but since then we have seen some serious changes in the price action because of the change in the underlying fundamentals. Anxieties around the trade war started to impact the sentiment and this triggered a profit warning by Wall Street analysts. On top of this, we also had the International Monetary Fund (IMF) coming out with a downward revision of the global economic growth. The bearish sentiment since then has picked up strength and many more hedge fund analysts have started to believe that there are more chances for a serious correction than a bull run.
On top of this, there are heightened geopolitical tensions between Saudi Arabia and the West due to the killing of journalist Jamal Khashoggi. This has put traders off from loading up major risk on bets in their portfolio. The situation is serious, and this has brought the special relation between Donald Trump and Saudi Crown Prince Mohammed Bin Salman under the spotlight. These geopolitical tensions are further anchored when we look at the mess created by Theresa May over Brexit. These geopolitical tensions are further anchored when we look at the mess created by Theresa May over Brexit. Italian budget woes just add the cherry on top . Simply put, the geopolitical tensions have started to make investors seriously worried about their portfolios and if we factor in the growth concerns over in China, it becomes clear why speculators have started to scale back from their short positions.
The recent CFTC data showed that hedge funds have decided that it is about time for them to start scaling back from their short position. This sends a strong bullish signal for the metal. This capitulation factor could intensify even further, should the Fed have a change of heart about their hawkish monetary policy. After all, Donald Trump has criticised the Fed several times about hiking the interest rate so many times this year. It is important to emphasise that back in 2015, when speculators had net long positions, it triggered a 30% move in the gold price. A similar move would help the price move to $1,500.
An equally important fact, worth mentioning at this point, is that the gold price has been gaining traction while the dollar index maintained its strength. During the past few weeks, we have seen a positive correlation between the dollar index and the gold price. This shows that gold and the dollar are moving in the same direction. This shows that the gold price is immune to the dollar effect now. -Naeem Aslam
Speculators Buy Gold at Record Pace
The most recently released CoT report showed aggressive short-covering in gold, with a record one-week amount of contracts bought.
Last week’s report showed large speculators scrambling for cover, as the one-week change of nearly +56k contracts was a record week. This doesn’t come as a big surprise, though, given the record short which had been built up in recent weeks and the sudden $45 rally, with most of it coming in one day.
GOLD POSITIONING CHART
From a short-term technical perspective, gold has a little room to go before hitting resistance in the 1235/40 area, but risk/reward for fresh longs is lacking at the moment. A test of the top of the Aug/Oct range in the 1210/1214 range may offer a good spot to look for price to hold for another push higher.
GOLD DAILY PRICE CHART (1235/40 RESISTANCE, 1210/14 SUPPORT)
Gold Regaining Its Portfolio Hedge Status
Interest in gold as a portfolio hedge is coming back this fall, with Bank of America (NYSE:BAC) Merrill Lynch (BAML) strategists projecting to see another short-covering rally in the near future.
BAML’s positive gold outlook is based on extreme short positioning in gold futures, weaker U.S. dollar forecasts, and investors’ increased demand for a portfolio hedge, the bank’s strategists wrote in a note published on Friday.
“The current environment is one where the precious metal is regaining its prominence as a portfolio hedge and has value now,” strategists said. “The market is currently very short gold futures and the likelihood of a relatively less hawkish Fed into year end and 2019 can prop up non-dollar crosses and increase the value of gold.”
BAML disclosed its long call options on the SPDR Gold Shares (NYSE:GLD) exchange-traded fund expiring in January, with the strike price at $117, according to the note.
Gold prices staged a recovery in October, with spot gold already up nearly 2% on Kitco.com during the last 30 days, last trading at $1,220.20, down 0.35% on the day. The December Comex gold futures hit a 10-week high last week and then slightly retreated to $1,225.10, down 0.29% on the day.
The yellow metal was weighed down by renewed risk appetite on Monday despite several unresolved geopolitical situations that could still boost prices higher, said Kitco’s senior technical analyst Jim Wyckoff.
“The U.S.-China trade war remains in focus after Trump administration economic advisor Larry Kudlow said China is doing ‘nothing’ to mitigate the matter. Reports last week said President Trump and Chinese leader Xi Jinping will meet at the G20 conference in Argentina in late November,” Wyckoff said. “Thursday’s European Central Bank regular monetary policy meeting will be closely watched by the marketplace.”
In the meantime, large speculators slashed their net-bearish positioning by more than half during the week-long period to Oct. 16, according to the Commodity Futures Trading Commission.
The disaggregated report showed that money managers stood net short by 49,382 contracts for the week ending Oct. 16, down from 109,454 the prior week. The bulk of the change was traders buying in order to exit from bearish bets, as the number of total shorts fell by 46,957. There was also some fresh buying, as reflected by a 13,115 increase in gross longs.
Analysts with Commerzbank (DE:CBKG) said that despite the decline, the net-short positioning still remains large, which could point to another short-covering rally in the future.
“Given the extent of the position squaring, we would have expected the gold price to rise even more sharply,” analysts wrote. “However, we envisage further upside potential for the gold price from this side given that net-short positions are still considerable.”