ScotiaMocatta Metal Matters

Featured quotes from the report:

“Gold continues not to attract safe-haven interest, even though parts of the global financial system are stressed.        International investors see the US as the go-to destination for safe investments.

• Lingering uncertainty as to the fallout from US trade disputes continues to undermine business and investor confidence.
• The rise in distress in emerging markets may prompt the US Fed to hold back from further interest rate rises…
• … any such move could see a swift rebound in confidence, as too could a resolution to the trade disputes.
• Large fund short positions in Gold, Silver and Platinum raise the risk of short-covering rallies.

Interest in Gold in most areas of demand has been weak, even investment interest – this despite numerous escalations in the geopolitical arena, including US trade disputes, some jittery emerging markets and the prospects of deeper US sanctions against Iran, all of which could trigger financial crises.

The net fund position ended August short 3,063 contracts, having been net short 8,710 contracts on 21st August; this is down from a net long position of 214,684 contracts in January….The last time the fund position in Gold was net short was in 2000, right in the early months of the 1999- 2011 bull market…. The largest net short position we have on record (going back to 1986) was 88,363 contracts seen in 1998. At 210,433 contracts, the gross short position is extremely extended – over the past 32 years it has averaged 47,800 contracts.

As the US economy shines, many others do not. Country-specific crises, whether political or financial, and whether triggered by higher US interest rates, poor governance or the threat of sanctions and trade tariffs, seem to be on the increase….This could be a win-win situation for Gold. As the emerging market barometer rises then safe-haven interest in Gold may return, especially given that Gold is now much cheaper than it has been for a long time. Alternatively, if the leading central banks of the world start fearing an emerging market crisis they may slow down their monetary policy tightening. Ironically, even Trump sees the rising US interest rate policy and stronger dollar as undermining America’s competitive advantage. So, either the US Fed, or Trump, may tweak policy to halt the rise in the dollar, which in turn could be a bullish development for Gold.

Summary – The high opportunity cost of holding Gold has no doubt weakened investors’ appetite to hold the metal. But, there is a big difference from not holding Gold to being of short it. The rapid shift in the funds’ position from being net long to net short and the record level of the gross short position suggests the market is vulnerable to a shortcovering rally. The Fed’s current hawkish stance favours a strong dollar, but the pain higher US interest rates are likely to cause emerging markets, especially if they also start to suffer a drop off in trade, may well mean the Fed becomes more dovish for the sake of the global economy. Any weakening in the dollar could then trigger short covering by the funds and that could lead to an aggressive rebound in prices.”

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