Gold price: Hedge funds pile back in

On Monday, upward momentum in the gold price continued to build, supported by weakness in the US dollar, a negative interest rate environment and worries over event-risk such as Britain leaving the EU.

In brisk early afternoon trading on Monday gold futures in New York for delivery in August, the most active contract, jumped to a high of $1,290.30 an ounce, up just over 1% from Friday's close and the highest in nearly a month.

After a dismal May, weak US jobs numbers signalling lower rates for longer saw gold bulls fight back in June and the metal is now trading 21.7% or $230 an ounce for the better this year. Higher interest rates raises the opportunity costs of holding gold as the metal provides no yield and any gains for investors is through price appreciation.

Amid the negative turn in sentiment on gold markets in May, large-scale futures and options speculators such as hedge funds sharply reduced record-breaking bullish positions built up since the start of the year. After getting wrong-footed by non-farm payrolls, they're piling back in.

According to the CFTC's weekly Commitment of Traders data up to June 7 released on Friday after the market close, "managed money" investors on the gold derivatives market slashed shorts – bets that gold can be bought at a cheaper price in future – and added to longs which lead to a 20% jump in overall net bullish position of 18.6 million ounces. That's down from 23.4 million ounces mid-May which was at the highest level since the August 2011 when gold peaked at an all-time high above $1,900.

“Low interest rates are a powerful propeller for higher gold and while U.S. rates are the main focus of the gold market, global rates are also a factor driving gold prices,” according to HSBC analysts quoted by Kitco:

“We detect increasing concern over the scale of bonds with negative yields. Negative yields may induce investors to go further out the yield curve in search of positive rates, penalize savers and raise concern over what might happen to investor portfolios were rates to start to rise. This is all positive for gold, and we expect it to remain so.”