Gold Likely To Weaken Further In Short-Term

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By Chris Shaw

As the gold price has waxed and waned this year the movements have been matched by volatility in trade flows as according to Barclays Capital earlier this year the physically backed exchange traded products (ETPs) dominated the market only to be replaced in recent weeks by short-term tactical traders.

The group points out in the March quarter gold held in trust across the 15 physically backed ETPs increased by 458 tonnes, which was more than the 321 tonnes of inflows recorded in the whole of 2008. Such funds are typically buy and hold types, reflecting longer-term and more stable demand.

But as Barclays notes, at the time this buying was going on there were questions in the market as to its sustainability given some talk buyers were switching from futures to ETPs to avoid concerns of not enough physical gold being available if investors actually wanted to take delivery of a contract position.

Also, the group takes the view some of the buying at the time was safe haven buying given the uncertain outlook for the global economy and financial markets, but the correlation has subsequently broken down as in recent weeks the gold price enjoyed some gains while ETP inflows have returned to levels more in line with those of last year.

With jewellery demand also relatively weak futures investors have returned to drive the market in the group’s view, supported by figures showing net fund length has increased by significantly more than inflows to ETPs in the June quarter. This means the market is being influenced more by short-term views on gold price drivers than by the outlook of longer-term investors.

Also the group notes the 3-month rolling correlation between the gold price and the US dollar has increased from negative territory in April to better than 50% now, meaning currency movements should play a more important role in determining the gold price in coming weeks.

With the group’s view being the US dollar will strengthen over such a period, and supported by bearish technical indicators for the metal price, Barclays sees further gold price weakness in the shorter-term.

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