Large scale speculators in gold futures are scrambling to cover massive short positions – bets that prices will fall – as the price of gold continues to recover from near four-year lows hit last month.
On Monday gold for delivery in June – the most active futures contract – leaped $23.30 or nearly 2% from Thursday’s closing price hitting $1,224.20 during lunchtime trade in New York before settling at $1,218.60, a six-week high.
Gold has now rallied some 6% from its 2015 low of $1,148.20 an ounce hit mid-March but is still well below highs above $1,300 reached in January.
Today’s strength is on the back of disappointing economic data released on Friday when markets were closed when the US Labor Department reported that the world’s largest economy added just 126,000 new jobs in March against expectations of a 245,000 gain and the smallest increase since December 2013.
The news strengthens the hands of Federal Reserve doves – including chair Janet Yellen – who believe any rise in interest rates should happen later rather than sooner so that the labour market could recover fully. The gold price and interest rates have a strong negative correlation. As the metal produces no income, the opportunity costs of holding gold rises in a high-yield environment.
After eight straight weeks of increasingly bearish positioning on the gold market to levels last seen December 2013, large investors like hedge funds or so-called “managed money” last week added 44% to net longs – bets that price will rise.
In the week to March 31 according to the Commodity Futures Trading Commission’s weekly Commitment of Traders data, hedge funds slashed short positions by a fifth and at the same time added to long positions in gold.
Silver futures also trended stronger on Monday with May contracts jumping 1.5% to exchange hands at $17.60 an ounce at the close. Like gold, silver went off to the races at the start of the year to hit a 2015 high of $18.36 on January 22 before falling back.
Silver positioning also turned bullish last week with speculators reducing short positions by 25% and adding to longs for a net long position of nearly 150 million ounces.
Like the price of silver, speculation in silver futures tend to be volatile. Hedge funds had to cover a net short position of 53 million ounces in October last year after pushing longs to a record of 234 million ounces only three months earlier.
Image by Anthony Catalano
