Gold: Bulls Vindicated After Record Bear Short-Run

With the Fed’s ‘helicopter’ Ben dampening market speculation that a cut in stimulus is imminent is leaving the gold bulls somewhat vindicated for now. The yellow metal has managed to rally just shy of +7% in the past two-weeks. This includes the +2.65% or $34 surge since the Australasian open yesterday. With Bernanke highlighting last week that it was way too early to make any judgment as to whether US policy makers will start winding down its stimulus program in September, has allowed the commodity to print the two-week biggest gain in nearly 20-months. It was only in April that the market witnessed the commodity bundle prices in free-fall, as some investors lost faith in this particular metal as store-of-value.

The market price action is telling investors that the “Fed wants to see some visible improvement in economic conditions” before policymakers begin tapering is providing underlying support for the metal. A softer dollar is also helping the commodity bundles price plight.

Last weeks CFTC data reveled that speculators increased their net-long position by +56% to 55,535 futures and options contracts by July 16. This is the highest recorded long position in seven-weeks. On the flipside, the short contracts fell the most since last November. The report also showed that the net-bullish wagers across 18 U.S.-traded commodities jumped +28%, the biggest such gain since March. Most of the gain in the net-long position is attributed to a retreat in the short-holdings, which slumped to 61,002 contracts from 80,147. Long contracts increased +0.6%. In hindsight, the record-large bearish position had left prices vulnerable to a “short-squeeze.”

Last week, the yellow metal briefly tested $1,300 in the futures market. Gold gained +1.3 % by July 16th, and capped the first back-to-back weekly gain since May. Year-to-date, the metals prices have slid -24 %, wiping just under -$60b from Exchange Traded Products, mostly after investors lost faith in the commodity as a store-of-value.

It’s not as if the market has turned wholly bullish all of a sudden – the longs have not raced that far ahead. The fact that the overall short positions were at a record, it was only a matter of time, that with good enough reason, the bears would want to cover. Both Ben and the dollar have provided that impetus. To many it seemed that investors had become complacent in their positioning of gold as it went up for so long – the bears can feel somewhat vindicated in this month’s price action.

A recent Reuters survey has spot gold averaging $1,410.75/oz. this year. That is -13% below the average forecast ($1,627) three-months ago. Going forward, the yellow metals prices are expected to remain weak as the Fed begins to scale back QE and the dollar rises.

Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell