Looking at our gold monitor below, it is difficult to build a bullish case for gold if current developments were the only driver for the yellow metal. With the dollar and bond yields on the rise, the inverse correlation with a relatively stable gold has deteriorated, a development that has reduced selling pressures from algorithmic trading strategies, normally a major contributor to daily trading volumes.
In addition, as mentioned the tailwind from future rate cuts has also faded as the market price in a higher for longer scenario. A development which for now continues to see some asset managers vote with their feet when it comes to investing in gold through Exchange-traded funds, the reason being the high opportunity cost of holding a non-interest paying position relative to short-term government bonds. The current cost of holding a gold position for 12 month is close to 6%, the bulk of that being the cost of borrowing dollars for one year, and until we see a clear trend towards lower rates and/or a upside break forcing a response, real money allocators will be looking for opportunities elsewhere.
ETF investors which include the above mentioned group of real money allocators have been cutting holdings for the past four months, leaving the total down by 172.4 tons during this time to 2757.8 tons, a 3-1/2-year low. The leverage fund net long position meanwhile continue to hover around 60k contracts (6 million ounces), some 35k below the one-year average.
