Gold market could see further ETF redemptions as prices turn negative on the year - Standard Chartered’s Cooper
The gold market continues to test its lower bounds, with one analyst seeing further fragility in the marketplace.
Although gold remains above its March lows, the precious metal hit another bearish marker as prices turned negative for the year. Spot gold last traded at $4,221.10 an ounce, down nearly 1% on the day. The precious metal is down more than 2% so far this year. Gold prices have dropped more than 5% since Friday, when prices broke below critical support at the 200-day moving average.
In her latest precious metals note, Suki Cooper, Global Head of Commodities Research at Standard Chartered Bank, said that the selloff could intensify as investors liquidate losing positions in gold-backed exchange-traded funds.
“We expect price action to become more vulnerable in the near term, driven by macro headwinds. Gold has started taking its cue from real yields again,” she said.
Cooper explained that, traditionally, investment demand in ETF markets has a closer correlation to real yields than to other structural factors in the physical market. Rising inflation is forcing markets to price in a rate hike from the Federal Reserve by the end of the year.
These market expectations are driving real yields higher, raising the opportunity cost of holding a non-yielding asset like gold.
“Tactical positioning turned positive in May, but ETP holdings fell (-16t) and have continued to decline in June,” she said.
Cooper said that the first technical price level investors need to watch is around $4,250 an ounce.
“An analysis of gold ETP flows shows that at least 270t of holdings are in loss-making territory at recent price lows of c.USD 4,250/oz; this rises to 465t if we assume the net redemptions this year were profitable and established at lower price levels, on a FIFO basis,” she said. “Loss-making positions would rise to 298t if prices fell to USD 4,000/oz. ETP holdings are vulnerable in the near term and could expose gold to further downside risk, with the next technical support level around USD 4,100/oz.”
Cooper added that renewed bullish momentum in the U.S. dollar is also adding to gold’s headwinds; however, she remains optimistic that gold prices can recover in the medium term.
“Loss-making positions would rise to 298t if prices fell to USD 4,000/oz. ETP holdings are vulnerable in the near term and could expose gold to further downside risk, with the next technical support level around USD 4,100/oz,” she said.
