Hedge funds’ bullish bets on gold jump to four-year high
Hedge funds and other large speculators boosted their net-long position in gold.
An inline US payroll report which makes a rate hike next month more of a certainty lifted the gold price to within sight of the psychologically important $1,100 an ounce level on Friday.
In massive volumes, gold for delivery in December – the most active futures contract – fell to a low of $1,081.40 shortly before the release of the data.
But after a series of huge buy orders gold shot up to $1,098.90 an ounce by mid-morning. Shortly before the close gains were pared to $1,094.60.
According to the latest figures from the Department of Labor 215,000 jobs were created in July while the jobless rate of 5.3% stayed at its lowest level since the financial crisis.
While not stellar numbers, a steady increase in average hourly wages and number of hours worked strengthen the hawks on the Fed’s decision making committee who want to raise rates at its September meeting.
It would be the first US rate hike since June 29, 2006 (incidentally a day the gold price jumped 3%).
What has now almost become a rule of thumb is that rising real interest rates raises the opportunity costs of holding gold because the metal provides no yield and therefore the price should decline. Higher rates also boost the value of the dollar – up 20% in a year – which usually move in the opposite direction of the gold price.
Since the global financial crisis the relationship between interest rate expectations and the gold price has only become tighter with some analysts believing the metal can serve as an early warning system of both the direction and magnitude of the move in rates.
But Friday’s reaction on the gold market suggests a rate hike – so long in the making – is now finally baked into the price.
A rate hike will also remove uncertainty in the market and encourage focus on fundamentals in the industry characterized by declining supply and robust physical demand.
In a recent note from Capital Economics, an independent research house, said that while the negative relationship between rates and gold is real “this link can be overdone”:
“Note first that it is a question of degree. An eventual rise in annual US interest rates to, say, 4%, would not have a huge impact on the relative attractiveness of holding gold, given its value as insurance against extreme events and the scope for prices to move by significantly more than 4% in a relatively short period.
“Suppose, for example, that the Fed is tightening policy because US inflation is picking up. In this case there may actually be increased demand for gold as an inflation hedge. Alternatively, suppose that Fed tightening triggers a sell-off in other asset markets, including equities as well as bonds. This may well increase demand for gold as a safe haven.”
And 4% rates remain a long way off, if the Fed gets there at all – consensus forecast for US short term interest is a climb to 3%. And only by the end of 2017.
3 Comments
kef long
Given that real interest rates are defined by interest received after allowing for inflation … the idea that a 0.5% hike in US interest rates automatically means that real interest rates are positive … is totally rubbish …. since only half the information is being considered. US dollar is rallying .. gold is falling relative to the US dollar but has maintained or increased value in virtually every other currency .. the world does not revolve around the US.
Important points are that the gold to oil ratio is currently 23, gold to platinum ratio greater than unity and gold to silver ratio lies at 72 – all of which are historically high – and point to trouble being priced in.
All of these ratio data point to low growth and financial trauma with gold holding its head as a hedge as gold bugs claim.
Perhaps the problem is the fixation of the price of gold relative to the dollar as opposed to the price of gold relative to other assets.
kef long
.. so when interest rates do rise .. the DOW will likely plunge .. and there will be a rush to gold given the financial catastrophe .. hence the 3% rise of gold mentioned in the current article in 2006.
The 200 and 50 moving averages crossed on the DOW today .. so with the death cross we might expect carnage and a run to safety ….
CanuckleDragger
Gold is doing exactly what the Fed and the 1% want it to do. We now live in a world where the most self serving @ssholes on the planet are pulling all the strings. They not only want more than they need, they want more than they can possibly use. The greatest investment the 1% ever made was buying the US government.