Gold exchange traded funds have experienced a strong bounce following net speculative futures positioning dropping to its lowest level since December 2008.
The gold price bounced sharply at the end of last week as investors appeared to view the recent sell-off as excessive. With the gold price nearing a 10-month low, investors jumped in at the end of last week, pushing the gold price up 2% on Friday as the odds of further quantitative easing from the main reserve currency central banks rising, and a reconfiguration of the Euro a very real risk. [Gold ETFs Rally to Weekly Gain]
Despite the rally, the gold price is likely continue to face near-term headwinds to strong gains until the Greece Euro issue is resolved one way or another. However, with futures positioning at multi-year lows. As detailed in the World Gold Council (WGC) report released last week, physical demand from central banks and China remained strong in 1Q 2012 and the removal of India’s gold excise tax may stimulate pent-up demand in India.
While the gold price has suffered as Europe has teetered on the edge of, but not quite fallen into, the potential abyss of a disorderly Greek departure from the Euro, any indication Greece might actually go over the edge will likely reverse the usual gold price-EUR/USD correlation as extreme panic drives safe-haven flows into gold (and the US dollar) as occurred in late 2008. An alternative scenario that involves a convincing solution to the Greek crisis will also likely benefit the gold price as EUR/USD rallies and gold follows. Until one of these two scenarios becomes clear, however, the gold price is likely to trade in a range.
Greece’s June 17 repeat general election will be an important event for gold. In the run-up to the election any large scale ECB intervention to stabilise Spanish and other peripheral European bond markets would also likely be Euro and gold price positive. [Gold ETFs a Safe Haven Again?]
China gold demand
China became the largest source of gold demand in Q1 2012 on the back of purchases ahead of Chinese New Year celebrations, according to the WGC. In its latest Gold Demand Trends report released last week, the WGC reports that gold demand was 5% lower than Q1 2011, largely a product of weaker gold jewellery purchases more than offsetting a rise in investment demand.
However, the value of overall demand was 16% higher than a year ago on the back of an over 20% rise in the gold price in the year to the end of Q12012. Indeed, even taking into account the 4% gold price decline since the end of Q1, gold remains up 7% over the past year.
Investors have been pushing precious metals futures positioning to multi-year lows as Eurozone fears weigh on market risk appetite.
Both palladium and gold futures net longs to 15 May (the most recent data available) dropped to their lowest level since late 2008, while platinum net long positions reached the lowest levels since late 2010.
The week ahead for precious metals
Investors will remain on edge not only about the lack of political coherence but also about the regions ability to generate growth via its austerity strategy.
Political rhetoric is therefore the most likely catalyst for directional cues this week in precious metals markets as they remain tied to market risk appetite.
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