Gold price drops again as ETF investors, hedge funds flee
Gold was coming under renewed pressure in late trading on Tuesday as negative sentiment swamps retail and institutional investors in the yellow metal.
Gold for delivery in February, the most active contract on the Comex market in New York, hit a low of $1,127.30 an ounce, levels not seen since the beginning of February this year. Gold has now trimmed its year to date gains to just under 7%.
In July hedge funds or so-called managed money investors in gold futures and options built up long positions – bets on a rising price – to 28.7 million ounces, the highest on record.
Investors in physically-backed exchange traded funds also poured money into gold right from the get-go this year and when large scale speculators began to cut back on bullish bets in earnest in September, ETF investors kept on buying.
But that all changed following the election of Donald Trump. Net longs held by hedge funds are now down 78% or more than 22 million ounces while gross shorts have risen three-fold since September. And this time ETF investors followed suit, pulling some 216 tonnes from vaults since November 8.
The sharp rise in real yields on US government bonds and the relentless dollar rally since November 8 has been a key driver behind the changed sentiment towards gold says Ole Hansen, head of commodity strategy at Saxo Bank, in a new research note and trading strategy:
Investors have continued to liquidate longs and at this stage the price needs to rally back above $1,150/oz in order to escape the current steep downtrend.
The market remains oversold on the 9-, 14- and 30-day horizons, but so far there has been no let up in the long liquidation with $1,100/oz. being the next big level should $1,124/oz give way.
Higher interest rates boosts the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing and investors have to rely on price appreciation for returns.
The dollar measured against a basket of the currencies of major US trading partners has surged since the US elections hitting fresh 14-year highs above 100 on Tuesday.
The greenback’s all-time peak of 164.7 was reached in February 1985. That coincided with a bottom in the price of gold of $284.25 an ounce.