Article / 31 August 2016 at 9:00 GMT

Gold resilient despite strong dollar, rate hike odds

Head of Commodity Strategy / Saxo Bank
  • Gold drifting lower on Fed rate hike speculation
  • Next major support lies between 1,300-10/oz
  • Fed waiting game could trigger long liquidation

Gold prices are on the wane as investors await a Fed rate hike, but the metal remains resilient in an environment of low bond yields and low confidence. Photo: iStock

By Ole Hansen

It's been a relatively quiet August for gold with the metal spending most of the month locked in a relatively tight range around $1,340/oz. But following Janet Yellen's speech last Friday, gold has been drifting lower as the dollar recovered on renewed speculation that the next US rate hike could be seen as soon as September. 

As August comes to a close, gold has once again returned to a key area of support between $1,310 and $1,300/oz. Failure to hold support could see gold retrace lower to the next major area of Fibonacci support between $1,267 and $1,250/oz. 

The latter level also corresponds with the immediate low ahead of the surprise Brexit vote result on June 23.

Spot gold with retracement levels
Source: Saxo Bank
ETP holdings steady

Just as in May when gold corrected by 8%, investors using exchange-traded products backed by gold have once again been showing a steady hand. While gold has been heading for its firstly monthly loss since May, total holdings have climbed by 25 tonnes to 2,032 tonnes, a 26-month high. 

Gold ETP holdings
Hedge funds hanging in there

Funds increased their net-long position through futures and options by 4% during the week ending August 23. The buying occurred ahead of the aforementioned speech by Yellen last Friday and the subsequent price weakness would have helped to trigger some long liquidation. 

Overall, however, hedge funds have been much less inclined to let go of what remains a near-record long position. Since the early July peak at 287,000 lots ( 28.7 million ounces), they have only reduced it by 8% and only then due to long liquidation (see the blue line on the chart below). 

The red line, which shows the gross short in the market, has actually been falling – again a sign of limited selling appetite. 

This could all change should gold fail to hold onto support at $1,300/oz with a break below this level having the potential to create a true test of gold's resolve following a 25% rally so far this year.
Speculative positioning in COMEX Gold futures
Dollar and US real yields posing a short-term challenge

US real rates have been rising steadily during the past couple of months and this, combined with a stronger dollar, has increasingly been challenging the overall investment case for gold. 

Gold drivers
But as long as central banks continue their increasingly fraught experiment with negative interest rates, global bond yields will remain at rock bottom levels. 

And when the time comes when it has to be reversed, global financial markets may experience an increased amount of stress which has the potential of further supporting alternative and safer assets such as gold. 

Global yield compression

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The longer-term investment case for gold remains, but just as we saw back in December the waiting game ahead of a Federal Open Market Committee decision at the September 21 meeting has the potential to trigger further long liquidation. 

Longer-term investors' belief in higher prices appears unlikely to be challenged so long as gold holds above $1,250/oz.

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
Comex Gold future hit a two month low at $1307 with futures volume spiking.


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