CHART: Gold price bulls kept faith as hedge funds wavered

A big factor supporting the gold rally – the best start to the year in more than a decade – have been investors in physical gold-backed exchange traded funds.

Global vault holdings have swelled to 1,883 tonnes, the highest since December 2013 following net inflows of more than 400 tonnes so far this year – a dramatic reversal of the trend during the last three years when a staggering 1,198 tonnes left funds.

As the chart shows the more than 6% decline in the price of gold in May did not deter ETF investors from picking up more metal and doubling down on their conviction of a rising gold price.

How gold bulls kept the faith when hedge funds wavered

Source: Saxo Bank. Click on chart for gold trading strategies from Saxo.

The behaviour of retail investors in the physical market was in stark contrast to large-scale futures and options speculators such as hedge funds which have been cutting back bullish positions.

Early in May the net long position– bets that prices will be higher in future – held by managed money investors on the gold derivatives market in New York hit the highest level since August 2011.

But with gold declining steadily from the $1,300 mark hit at the end of April hedge funds started to cut back the bullish positions, slashing bets by 36% or more than 8 million ounces to 14.9 million ounces by the end of the month. With gold rallying hedge were starting to build up positions again adding 20% to overall positioning last week.

On Thursday gold briefly climbed to a 22-month high in a dramatic day of wild swings and massive volumes. After peaking in morning trade gold reversed course to exchange hands for $1,285 an ounce in after hours dealings, but still up more than 21% or $225 an ounce this year.