ETF investors pile in despite worst gold price run in 6 months

On Wednesday, gold suffered its sixth straight day of declines as economic data out of the US made an early rate hike by the Federal Reserve more likely and large-scale futures market investors scrambled to liquidate long positions not seen since 2011.

In heavy early afternoon trading gold futures in New York for delivery in June, the most active contract, dropped as low as $1,217.70 an ounce to a seven-week low before clawing back some lost ground. The gold price is down $60 per ounce since Wednesday last week, its longest unbroken losing streak since late November .

Low growth, negative sovereign-bond yields, the potential of inflation making a rare return and upcoming event risks make us view the current setback as a healthy correction

While sentiment seems to have shifted as the Fed takes a much more hawkish stance and bond yields, which have a negative correlation with the gold price, rise a new note by Ole Hansen, head of commodity strategy at Saxo Bank, makes the case that the long-term outlook still favours upside despite the current blip in the gold price.

The World Gold Council in its latest demand trends report showed ETF investors who've been stocking up on the metal right out of the gate in 2016 were behind the best ever first quarter for the metal and the second largest quarter on record after Q1 2009. The jump was entirely driven by investment demand which was 122% higher than Q1 2015 and increased three-fold quarter on quarter.

Unlike hedge funds playing the futures and options market which "add and reduce positions in accordance with market behaviour" says Hansen, ETF investors view the price weakness "as an opportunity to accumulate exposure in the belief that the long-term direction remains to the upside":

"While US interest-rate expectations are being adjusted higher and the dollar continues to recover, gold will be struggling.

"However low growth, negative sovereign-bond yields, the potential of inflation making a rare return and upcoming event risks make us view the current setback as a healthy correction within the established uptrend."

ETF investors pile in despite worst gold price run in 6 months

Source: Saxo Bank