Hedge funds push bullish gold price bets back up

On Monday gold continued to drift lower following a drop on Friday in response to a much better than expected US jobs report and a stronger US dollar.

Gold futures in New York for delivery in December, the most active contract, were trading at $1,340 an ounce in late trade. Last week gold  closed at a two-year high near $1,380 and year to date the metal is still up 25% or nearly $300 an ounce.

Large scale gold futures and options speculators or "managed money" investors such as hedge funds were wrong-footed by the positive employment and wage numbers and had been positioning themselves for further gains in the gold price ahead of the Dept of Labor data.

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.

Hedge funds push bullish gold price bets back up

Source: World Gold Council

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.

Those positions were subsequently trimmed but according to the CFTC's weekly Commitment of Traders data up to August 2 released on Friday speculators cut shorts and added to longs for a net gain of 1.3 million ounces to 26.7 million ounces or 831.3 tonnes.

That once again tops  managed money investors' holding on the gold derivatives market in New York in August 2011 when gold was peaking at an all-time high of $1,900.

Hedge funds' steady support of higher gold prices may not be that surprising, considering the returns enjoyed by investors in gold this year.

A report by the World Gold Council released last week showed gold has been one of the best performing assets so far this year, outpacing all major benchmark indices.

From an investors point of view, and uncharacteristically for commodity investments, gold's gains was not accompanied by wild swings. As the graph shows gold volatility over the past year was comparable to stocks.

SEE CHART: Just how wrong were 2016 gold bears