Another prediction for the imminent rise in the gold price has been issued, this time from exchange-traded fund (ETF) provider WisdomTree.
Based on data for futures contracts, gold appears “ripe for a short-covering rally” due to “unusual” positioning in the market.
WisdomTree’s base case is for the metal to rise from around $1,200 per ounce at present, to $1,270 at the end of the year, and as high as $1,320 by this time next year.
Although macro factors like the rise in interest rates – which traditionally weigh on the gold price – are important, WisdomTree director Nitesh Shah says sentiment towards gold is the key element.
WisdomTree notes that speculative positioning in the gold futures market – a measure of sentiment - is at its lowest level since 2001, but that this could be restored, aided by factors such as US protectionism and Brexit, which would both play to gold’s strengths as a safehaven.
“Simply put,” says Shah, “we think the current negative net speculative positioning is unusual, particularly in light of the risks in the market. Consequently, even in a flat to mild price recovery, many short gold positions [investments based on the expectation that the metal’s price will fall] will be covered. This tends to exacerbate price gains and could set in motion a rally.”
Shah said that if “tit-for-tat protectionist measures escalate” in the trade tensions between the US and China, the market could be driven into a risk-off mindset and gold would be bought for its defensive qualities.
Other scenarios with the same effect are Brexit negotiations that could see the UK and EU harmed if there is a failure to negotiate a trade agreement, while financial tensions may still give developed world equities a shock despite their resilience lately.
There has been a 4% fall in the yellow metal’s price in the three months from the end of June. Shah said the decline was not justified due to an 11 basis-point rise in bond yields and a 0.4% gain in the US dollar over the same period.
Gold’s “poor performance” seems to have been driven by a collapse in sentiment, Shah said.
“There has been talk in the market that some investors have lost faith in the precious metal as a safe haven, since it failed to appreciate during the recent emerging markets sell-off. But there’s a flaw in that argument: the fact that developed market equities remained strong during the period suggests that investors weren’t looking for a safe haven,” Shah says.
ETF Securities recently said investor flows into gold exchange-traded products suggested positioning for a reversal in the falling price of gold, and the World Gold Council also partly used futures data to suggest a turnaround.
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