Hedge funds came prepared for last week's gold price plunge
On Monday gold staged a bit of a comeback with December futures trading on the Comex market in New York exchanging hands at $1,265.20 an ounce in European trade, up more than $13 from Friday's close.
Gold has been on the defensive since last Tuesday when heavy selling saw it crash through $1,300 an ounce to a level last seen before the Brexit vote gave it a new leg up. For the week gold lost more than 5% with Friday US jobs numbers pushing the metal below $1,250 for the first time since the beginning of June.
Gold touched a two-year high in July around $1,380 an ounce and year to date the metal is still managing gains of nearly 20% or more than $200 an ounce, one of its best annual performances since 1980.
But there are signs that hedge funds active on the derivatives market have lost confidence in gold's ability to move higher.
Bullish bets placed by hedge or so-called managed money on gold futures and options are down nearly 30% from the July high and the lowest net position since May's correction, when gold came close to falling through the $1,200 an ounce level.
Last week according to the CFTC's weekly Commitment of Traders data up to October 4 released on Friday speculators added 38% to short positions – bets that gold could be bought cheaper in future, and cut longs by the equivalent of 4.2 million ounces. On a net basis bullish bets have now fallen to 20.5 million.
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.
The trend was thoroughly reverse this year however with investors building large bullish positions culminating in an all-time record number of net long contracts – bets that gold will be more valuable in future – in the first week of July of 28.7 million ounces.
That was more than managed money investors' holding on the gold derivatives market in New York of August 2011 when gold was peaking at an all-time high of $1,900.