UBS: Bad news already baked into gold price
On Tuesday, gold was swept up in the negativity on equity and commodity markets as a rally in response to a decision by the US Federal Reserve not to raise interest rates begins to fade.
In late afternoon dealings on the Comex market in New York, gold futures with December delivery dates were down $8.90 or 0.8% to $1,123.90 an ounce in another day of relatively quiet trade.
That's still up from just above the $1,100 level ahead of the Fed's hold which sent the dollar tumbling and bond yields falling. Bond yields and gold and the dollar and gold have strong negative correlations.
Swiss investment bank in a research note on Tuesday said it may be time for investors to "warm up" to gold, especially over the medium to long term.
UBS said its "models suggest that US equilibrium real rates may settle lower versus previous cycles and versus current market expectations."
In addition improving supply and demand fundamentals and the bank's belief that "the bulk of the adjustment to the current and expected macro environment has already taken place," should also boost the metal:
"Right now, investors are simply not engaged. It's been a tough market to trade and there are other assets that are acting as alternative avenues to express macro views. While the lack of interest has meant that there is less urgency to buy dips, it also means that there is less selling firepower. In addition, the risk/reward of going short has deteriorated," UBS argues.
It appears that gold speculators were wrong-footed by the decision to keep interest rates near zero as the positioning by hedge funds on the New York futures market shows.
According to the CFTC's weekly Commitment of Traders data for the week to September 15 large speculators on Comex – referred to as "managed money" – slashed net bullish positions by 75% to a mere 686,000 ounces.
Long positions – bets that gold will be more expensive in future – were reduced to a more than five year lows, while short positions approaching 10 million ounces were built up.
In late July and early August, hedge funds entered bearish positions not seen since at least 2006, when the Commodity Futures Trading Commission first began tracking the data.
Image of gold pour at Gold Reef City in Johannesburg, South Africa by Dan Brown
A huge gap has opened up between the dollar, bond yields and gold – the Fed-inspired rally may have only begun.