Gold rebound due to tech and fundamental
World Gold Council says in its’ Investment Update for the August 2018 that, Gold has fallen to a 20-month low amid sharp EM currency depreciation. At these levels, “we believe the gold price may bounce back. Consumer demand is likely to be supportive in H2. And short positioning may quickly reverse should one of the many current macroeconomic risks materialise, increasing investment demand.”
The gold price lost 3% during the first half of August, a downturn that was exacerbated by gold's fall below US$1,200/oz – an important technical support level – for the first time since early 2017. Gold was propelled down by the strength of the US dollar against both developed and emerging market currencies, particularly, a weakening of the Chinese Yuan first and Turkish lira later.
In fact, the dollar's strength has been one of the most important drivers of gold's performance this year as confrontational trade rhetoric and sanctions has so far played in favour of the US. In addition, both the ECB and BOJ have delayed policy rate hikes, increasing differentials between interest rates in the US.
But gold may rebound due to both technical and fundamental reasons.
Gold speculative positioning in futures markets is increasingly short. CME managed money net long positions stand at a record low since 2006 – when data was first broken down by investor type. Furthermore, net combined speculative positions, which go back further, are negative for the first time since December 2001 In recent years, a large increase in short positions has been followed by a sharp rally in gold.
And while net shorts were more prevalent in previous decades, there have been structural changes that make these positioning levels different and likely short lived. Among them are:
• Economic development in emerging markets (EM), especially China and India, has increased and diversified gold’s consumer and investor base, as the combined share of annual demand of those two markets has doubled over the past 20 years from 25% to 50%.
• For almost a decade, the expansion of EM foreign reserves has resulted in net gold demand by central banks – approx. 500 tonnes per year – as a source of return, liquidity and diversification.
• Gold production hedging has also changed dramatically, as miners have not only reduced forward sales but also consistently de-hedged their cumulative positions since 2000.
• The opportunity cost of holding gold is considerably lower as nominal and real interest rates are approx. 3% below their average level during the 1990s.
But a bounce back in the gold price can only be sustained if there are fundamental reasons to encourage consumers and long-term investors to seek exposure to gold.
