Hedge funds aren't wavering on gold price rally

On Monday, gold was trending higher thanks to a weaker dollar ahead of a US Federal Reserve meeting where investors would look for clues of the timing of only the second interest rate hike in a decade.

In cautious trading gold futures in New York for delivery in June, the most active contract, advanced to a high of $1,243.80 an ounce in morning dealings before paring some of those gains.

Gold has been drifting lower after hitting a 13-month high of $1,274 an ounce in March but remains up just under 17% in 2016.

Large gold futures and options speculators or "managed money" investors such as hedge funds have also stayed bullish on the metal despite expectations of higher interest rates in the US later this year.

Hedge funds dramatically raised bearish bets on gold during the final months of 2015 pushing the overall market into a net short position – bets that gold could be bought back at a lower price in the future – for the first time since at least 2006, when government first started to collect the data.

"Gold has very limited near-term upside in our view, reflecting a limited ability of the Fed to surprise on the dovish side and given very high levels of gold net speculative positioning and ETF holdings"

The trend was thoroughly reverse this year however with investors building large bullish positions. Last week hedge funds pushed longs – bets that the gold price will rise – to the highest level since the mid-August 2011. Gold futures peaked at an all-time high above $1,900 an ounce that month.

According to the CFTC's weekly Commitment of Traders data up to April 19 released on Friday speculators once again added to long positions to reach 21.9 million troy ounces or 682 tonnes.

At the same time speculators cut their short positions which saw net longs positions grow to 18.8 million ounces. That figure is the highest since August 2012. Overall managed money position has swung more than 660 tonnes since end-December's record net short.

Not everyone making bets in the gold market are this bullish. On Friday, Goldman Sachs has reiterated its recommendation to short gold according to a report by The Bullion Desk.  According to the investment bank the 2016 rally was driven by worries over global growth and asset price volatility and "the corresponding dovishness by the Fed":

More recently, risky assets have rallied sharply and gold has underperformed while sentiment about Chinese and global growth has improved and while the market continues to price in a cautious Fed, it added.

Goldman expects recent and forthcoming US data, supported by easing financial conditions, to result in a more hawkish Fed, higher yields, a stronger dollar and the return of divergence.This in turn is likely to put downward pressure on gold prices towards the bank’s near-term target of $1,100.

“Gold has very limited near-term upside in our view, reflecting a limited ability of the Fed to surprise on the dovish side – the market is now only pricing 25 [basis points] of rate increases during 2016 – and given very high levels of gold net speculative positioning and ETF holdings,” it said.