Rising tensions in Ukraine has spurred safe-haven gold buying in a market which had been looking stale in recent days. Gold prices, which have gained 12 percent this year, have been caught between resistance at $1,361 and support at $1,307 for some time now.
Although the upward trend in prices this year has shown strong momentum, the move was running out of steam as Chinese physical demand slows down and spec positioning looks frothy. Gold's current safe-haven bid should help to overcome technical resistance, especially if the Ukrainian crisis escalates.
Gold futures dropped from a 17-week high as demand eased after Russian President Vladimir Putin said that there is no immediate need to send troops to Ukraine. As we write, gold futures were down $13.90 or 1.03 percent to $1,336.40. They trading between $1,331.20 and $1,352.90 during the day.
[Related -SPDR Gold Trust (ETF) (GLD): Is It Time To Buy Gold?]
UBS strategist Edel Tully expects gold will remain bid so long as Ukraine/Russia tensions remain high, but that needs to come from fresh longs as gross shorts are now much reduced.
The 20-day rolling correlation between gold prices and the S&P500 Index remains in negative territory at -0.13 – gold should continue to benefit so long as risk-aversion weighs on equities. Recent dollar weakness is also helping, with the DXY Index currently around the lows for the year and gold's relationship with the dollar at -0.54.
However, an over-extended market positioning is a concern as net longs increased by another 2.4 million ounces (moz) as of Feb. 25 and gold spec length is up 154 percent since the beginning of the year, although the net position at 14.98moz is still quite low compared to historical standards.
[Related -What's the Game Changer for Gold?]
Tully noted that the substantial increase in spec length in a relatively short span of time raises the potential for a short-term washout once geopolitical risks dampen.
Turning to other market moving developments, the US February employment report will also once again take center stage this Friday. Consensus expectations are for an improvement in payrolls from January, albeit a modest one at 150k vs 113k last month.
The tolerance for disappointment is probably relatively high at the moment, with the market well-aware of adverse weather conditions impacting economic activity. This was highlighted by buoyant consumer sentiment: the University of Michigan Confidence number came in at 81.6 versus 81.2 consensus and previous, and weighed on gold last Friday. Jobless claims last week were also worse than expected, which likely prompted some reassessment of expectations for the nonfarm payrolls.
So, it would have to take a substantially lower print for gold to get a significant boost. On the other hand, a better-than-expected print would likely trigger profit-taking.
Tully, however, believes that any downside would be limited as long as geopolitical uncertainties persist and wider financial markets remain in risk-off mode.
Chinese demand, one source of positive sentiment for gold so far this year, is showing some signs of slowing down – volumes trailed off by the end of last week and the Shanghai Gold Exchange (SGE) discount to spot deepened to $2.
Nearly 16 tonnes combined turnover for the two SGE gold contracts is not necessarily poor in absolute terms, but at the moment the discount is getting a lot of attention. After all, the year started with SGE at a $20 premium.
Tully said that volumes are likely to taper off further up ahead given the CNY under pressure and market participants focusing on the SGE discount.
Gold net longs gained by 2.4moz to 14.98moz, mostly on short-covering. Gold gross shorts currently sit at 8.7moz, the lowest level since early November. Gold spec positions are currently at the highest since late March last year after adding a net 9.09moz since January. Silver positioning was up by 22.35moz to 203.69moz on a combination of fresh longs and short-covering.
In the week to Feb. 28, gold ETF holdings were up 0.30moz to stand at 59.09moz. Investors added 173koz to their holdings in the SPDR fund, 87koz in the Source Physical Gold P-ETC fund and 26koz in the GBS (LSE) fund.
Silver ETF holdings extended 2.15moz to 616.16moz. Majority of these inflows were witnessed in the iShares fund, which gained by 1.83moz. Also, Investors added 296koz to their holdings in the ETFS (NYSE) fund and 30koz in the Julius Baer fund.
No comments:
Post a Comment