Food for Gold Bulls: Three Reasons Gold Could Be Set to Rebound

Gold fell about 3% through the first half of August, dropping below the key $1,200 support level. But a report by the World Gold Council released this week lists three key fundamental and technical reasons the gold price may well rebound in the near future.

• An unusually short market
• Financial market uncertainty remains
• Natural buyers may step in

As the WGC points out, dollar strength has been the primary driver behind gold over the last several months. The perception that the US will win the trade war, the anticipation of further Federal Reserve tightening and rate hike policy delays by both the European Central Bank and the Bank of Japan have boosted the greenback.

Peter Schiff has been saying that dollar strength simply isn’t going to last and that everybody betting on the US winning the trade war is wrong. There is also political pressure on the Fed to ease up on rate hikes. But even with dollar strength, the World Gold Councils sees some reasons for investors to be bullish on gold.

An Unusually Short Market

Speculative positioning in gold is increasingly short.  CME managed money net long positions stand at lows not seen since 2006. Net combined speculative positions, which go back further, are negative for the first time since December 2001. As the WGC points out, in recent years, a large increase in short positions has been followed by a sharp rally in gold.

According to the WGC report, net shorts were more prevalent in previous decades, but there have been structural changes that make these positioning levels
different and likely short-lived.

1. Economic development in emerging markets has diversified and increased gold’s consumer base.
2. The expansion of EM foreign reserves has resulted in net gold demand by central banks.
3. Gold production hedging has changed dramatically, reducing forward sales and de-hedging cumulative positions.
4. The opportunity cost of holding gold is lower with lower real interest rates.

Continued Financial Market Risk

Despite all of the bullishness on the stock market in the US, the WGC sees plenty of market risk globally. As it points out, gold has already allowed non-US investors to hedge risks associated with a depreciating currency – for example, the euro, Chinese yuan and the Turkish lira. The WGC lists a number of reasons investors should be wary.

1. The current US expansion is the second-longest in history.  It has delivered the longest stock bull market in modern times, pushing valuations to multi-year highs while real rates remain subdued. We’re due for a crash.
2. Trade war – expanding or maintaining sanctions for a longer period will likely damage global growth.
3. Developed market economies are “heating up” bringing on the threat of inflation. As we have said repeatedly, inflation is good for gold.
4. There is a risk of a Brexit spillover effect in the European economies.

Natural Gold Buyers May Step In

As we’ve been saying, gold is on sale. Lower prices will likely spark some demand.

Gold’s recent price pullback will likely support consumer demand as, historically, lower prices have increased jewelry buying. For investors, gold’s current price range may offer an attractive entry level.”

We’ve already seen signs of this. The Chinese are buying gold.

The rise in investment demand in Q2 has been linked in part to the depreciation of the yuan, as gold is often used as a currency hedge. This trend has continued into Q3 with increasing volumes in Shanghai and robust inflows in Chinese-listed ETFs over recent weeks.”

We’ve also seen a “tilt toward buying” in India. Demand for the yellow metal surged in July, and analysts expect a good growing season to boost Indian demand further in the second half of this year.

Conclusion

The World Gold Council Concludes that a period of heightened geopolitical risk with the potential to impact the global economy could be supportive of gold even with continued dollar strength – and as Peter has shown, continued dollar strength seems unlikely.

Gold could trade lower if the US dollar increases its strength, but in the light of positioning in US, and increased interest from buyers in China and India, the risks seem skewed towards a recovery.”

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