Commodities | Jul 31 2012
– Gold short positions elevated on Comex
– Standard Bank notes such peaks often precede a rally
– ETF demand a key support for the gold price
By Chris Shaw
For just the fifth time since physically backed gold ETFs (Exchange Traded Funds) were introduced to the market in 2004, short positions in Comex gold futures stand out at present in the view of Standard Bank. In each of the four previous short-position peaks – May 2005, June 2006, September 2008 and January 2011 – gold rallied as shorts were covered.
Comparing the gold price performance from the time the shorts peaked to the time shorts reached a bottom, shows that in 2005 gold rallied by 25% between June to December, from July to December of 2007 gold rallied by 23% and from the end of January to the end of August 2011 the gold price rose by 36%.
From the middle of September to the end of December 2008 the gold price actually declined by 1%, though Standard Bank notes the price subsequently rallied from US$840 per ounce to US$1,000 per ounce by the end of February 2009.
While a large short position by itself doesn't imply the gold price will rally, Standard Bank points out the danger with such a position is the market becomes crowded. This means an external event can result in substantial short-covering.
Standard Bank remains bullish on gold, expecting the price of the metal will touch US$1,900 per ounce during the final quarter of this year. This expectation is not built on the large current short position alone but the position supports a positive view centred on current liquidity levels and low real interest rates.
Barclays Capital has also looked at gold, suggesting in the absence of any fresh catalysts to drive the metal's price higher, downside support for gold will be driven by two factors. The first is the level of physical demand from China and India, the two largest consumers of gold.
The second is the level of resilience of ETF holdings. Fresh incremental ETF demand has slowed, Barclays noting from more than 600 tonnes in 2009 inflows have fallen to 332 tonnes in 2010 and 175 tonnes in 2011.
for 2012 so far, Barclays notes flows have been positive but by only 36 tonnes year-to-date. This is regarded as a positive for prices, as net interest continues to be on the demand side of the equation despite the sharp gold price moves seen so far this year.
But as with other investments, Barclays suggests there may be a price point where ETF holdings of gold become vulnerable. Analysis of current holdings suggests a quarter of the metal held in ETFs has been amassed in the US$900-$1,000 per ounce range, while at prices between US$1,550-$1,920 per ounce gross redemptions have increased. This could represent both profit-taking of earlier positions and liquidation of exposures that are under water in the view of Barclays.
According to Barclays, US$1,500 per ounce appears to be a trigger level for ETF holdings, as 2,172 tonnes of the metal had been accumulated before this price was breached. This leads Barclays to suggest below this level, prices are more likely to be significantly exposed to the downside.
Technical limitations
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