Even after gold experienced its best quarterly rally in 30 years, interest in the metal from investors and speculators alike has continued to be strong. We’re seeing the considerable number of bets on gold futures rising. Perhaps most importantly, it’s the large money managers (such as hedge funds) that are moving into these long positions.
Long Bets on Gold
As succinctly stated by a headline from Bloomberg, “Gold Lovers Bet the Party Isn’t Over.” The yellow metal advanced a staggering 17% during the first quarter of 2016 alone. Most stocks, indices, or investment funds would absolutely die for those kinds of returns on an annual basis, let alone a single quarter. Indeed, it was the biggest jump for the gold price (in terms of percentage gains) during a calendar quarter since 1986.
The “party” for the gold market has arrived swiftly and, seemingly, without warning. Speculators were net short (more bets that prices will drop compared to long positions) on gold as recently as the beginning of the year. This made sense, with gold prices sinking as low as about $1,050/oz to end 2015. By many accounts, this was when the bottom was in for gold prices.
Sure enough, gold rallied on the back of an absolutely abysmal January for Wall St. It touched a 13-month high above $1,280/oz in mid-March before subsequently sliding back to its current range near $1,230/oz. One of the main beneficiaries of the surge for gold has been the exchange-traded funds (ETFs) that are backed by the metal. In the aggregate, these funds are now holding nearly 1,800 metric tonnes of gold bullion.
Bullish Reasons, Potential Roadblocks
Amid the widespread uncertainty across the global markets, gold is rightly seen as the best safe haven. This is particularly true when interest rates are so low around the globe. Moreover, there aren’t many other places to run: Typical safe havens like the Japanese yen and U.S. Treasurys have been piled into already. The yen recently approached 110¥ per dollar, much to the chagrin of the stimulus-obsessed Japanese government. Meanwhile, the benchmark 10-year Treasury note has seen its yield plunge to 1.72%, which is essentially at near-crisis levels. (Bond yields fall as demand for them increases.) 10-year yields were 1.90% as recently as last week.
Gold prices are also helped by a weaker dollar. The extended rally for the USD through 2014 and 2015 has probably lost its steam. After touching a peak just above 100.0 on the DXY index in late December (when gold was at its bottom, not coincidentally), the greenback has fallen from that peak. It is currently trading around 94.6 on the DXY.
However, one development that could impede gold’s continued strength and unravel those long bets on gold is increasing U.S. interest rates. The odds of a rate hike have been falling due to a more dovish tone from the Fed, but this could well be typical misdirection from the central bank. Some analysts now believe the market has overshot the true chances that interest rates will rise, and aren’t pricing this into the gold and dollar trades. Only time will tell if this scenario plays out in 2016.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.