Gold price touches 2-year high

In volumes of nearly twice the daily average and amid huge swings up and down the metal pared its gains by early afternoon when a couple of huge sell orders were executed, but year to date the metal remains higher by over 23% or more than $250 an ounce.

Reuters quoted ING analyst Hamza Khan describing the turnaround in sentiment following gold’s retreat during May:

“We sold off in the first place because of the rocketing dollar, impending rate hikes, and people flooding into equities as they took a risk-on approach. But that’s not the world of June 2016.

“We have equities selling off, oil selling off, the fear that Brexit will hit the markets. When you’re in this risk-off environment, where do you go? Gold is a pretty good solution.”

Worries over the looming British referendum intensified on Thursday after the shooting death of a member of the country’s parliament. Ole Hansen, head of commodity strategy at Denmark’s Saxo Bank says “the potential leave vote does not only raise questions about the impact on the UK but also the contagion risk to the rest of Europe. Other countries, if given the chance, would likely also be showing scepticism towards the European Union.”

June’s leg up was sparked by non-farm payroll numbers in the US for May  that showed the slowest gains in new positions in almost six years. That postponed the likelihood of a rate cut at least beyond the summer, which was confirmed by a dovish Federal Reserve meeting this week.

Higher interest rates raises the opportunity costs of holding gold as the metal provides no yield and any gains for investors is through price appreciation. Lower for longer US rates also hurt the dollar which usually moves in the opposite direction of the gold price.

ETF investors remained buyers of gold all through May despite the pullback in the gold price and in contrast to hedge funds were cutting back their bullish positions.

The gold price has a close correlation to real interest rates (i.e. after adjusting for inflation) and with core inflation in the US now above 2% thanks in part to higher oil prices, real interest rates are forecast to stay at lower levels for an extended period. On Thursday the yield on the 10-year TIPS (US Treasury Inflation Protected Securities), slumped to its lowest since April 2015 while Germany’s 10-year bund dipped to a record negative yield. Rates in Japan, Switzerland and other developed market have been in negative territory for a while.

Another factor supporting the gold rally – the best start to the year in more than a decade –  have been investors in physical gold-backed exchange traded funds.  Global vault holdings have swelled to more than  1,880 tonnes, the highest since December 2013 following net inflows of more than 400 tonnes so far this year – a dramatic reversal of the trend during the last three years when a staggering 1,198 tonnes left funds.

ETF investors remained buyers of gold all through May despite the fall in the gold price and in contrast to large-scale futures and options speculators such as hedge funds which were cutting back bullish positions.

But hedge funds are now also piling into gold again. According to the CFTC’s weekly Commitment of Traders data “managed money” investors on the gold derivatives market slashed shorts – bets that gold can be bought at a cheaper price in future – and added to longs which lead to a 20% jump in overall net bullish position of 18.6 million ounces.

The turn in sentiment on futures markets in 2016 have been dramatic. At the end of last year hedge funds entered a net short position for the first time since 2006 and by mid-May had built up a bullish position not seen since August 2011 when gold peaked at an all-time high above $1,900.