Hedge Funds are holding First-Ever Gold Net-Short Position (July 2015)
After being net long all the way from USD 1900 to USD 1100, Bloomberg reports Hedge Funds Are Holding First-Ever Gold Net-Short Position.
Hedge funds are holding the first ever bet on a decline in gold prices since the U.S. government started collecting the data in 2006. (base-text by Mike Shedlock: / http://www.investing.com)
The funds and other speculators shifted to a net-short position of 11,345 contracts in New York futures and options in the week ended July 21, according to figures from the U.S. Commodity Futures Trading Commission. Goldman Sachs Group)’s Jeffrey Currie says the worst is yet to come for gold, and that prices could fall below USD 1,000 an ounce for the first time since 2009. “The risks are clearly skewed to the downside,” Currie, the bank’s New York-based head of commodities research, said in a phone interview Tuesday.
Currie isn’t alone in predicting more declines. ABN Amro Bank NV’s Georgette Boele and Robin Bhar of Societe Generale) AG say bullion will approach USD 1,000 by December.
From a contrarian point of view, this might seem like good news. Strong negative sentiment is a prerequisite for a strong rally. It would be far worse if everyone was bullish during this decline. However, as Mike notes, sentiment is not a timing issue.
One can always look at two demand factors for gold, the Fear Trade and the Love Trade. The Love Trade is the purchase of gold for weddings, anniversaries and cultural celebrations while the Fear Trade is gold’s reaction to monetary and fiscal policies, particularly real interest rates.
Historically, the Love Trade has been on the upswing starting around [...] early August—in anticipation of international festivals and holidays such as Diwali, Christmas and the Chinese New Year. [...] Gold may be at an attractive level to accumulate, and gold stocks can offer grater beta when gold begins to revert to its mean.
The Fear Trade on the other hand involves the Fear Trade and real interest rates (inflation – CPI = real interest rates). Several times in the past I’ve explained how gold tends to benefit when real interest rates turn negative. When the rate of inflation exceeds the yield on a five-year Treasury note, it makes gold much more attractive to many investors.
As per July 2015, the five-year Treasury yield sits at 1.58 percent while inflation is crawling along at 0.1 percent. This means that as per July 2015 real rates are a positive 1.48 percent—a headwind for gold.
Finally Gold has led a retreat among raw materials, as the Bloomberg Commodity Index this week (as per ME July 2015) fell to a 13-year low.