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Heraeus Precious Appraisal

  • Edition 02 - 20 January 2020

A lot of risks are already priced in for gold

The last time gold futures open interest and the speculative net long position reached record highs the gold price fell 18% over the next five months. NYMEX futures open interest was equivalent to 79.7 moz at the beginning of January, 21% higher than the previous record in 2016. Additionally, the non-commercial traders’ net long position reached 32.8 moz, 4% above its previous high point. Trends can persist for some time with prices and the speculative net long position still rising, but such high open interest and significant commitment by traders to being long gold is a sign that bullishness has reached an extreme and a top in the gold price is near.

The gold price rose by 39% from the low in 2018 to its peak this month, as it jumped on the news that the US had assassinated an Iranian general. The subsequent retreat in the gold price shows that individual events do not usually move the price for long. However, a number of factors have combined to encourage safe-haven purchases of gold. Increasing political and economic uncertainty, more monetary easing from the Federal Reserve, falling bond yields and huge quantities of negative yielding debt have all played a part.

A great deal of uncertainty is already priced in, but there are still some potential drivers for a higher gold price in the medium term. In the US, the presidential election in November will increasingly become the focus. With China-US trade talks having reached an initial agreement, attention is turning to the EU. Whether or not that is a positive move could depend on whether President Trump thinks his re-election chances are better if he closes another trade deal or he continues to take a firm stance and raise tariffs. If economic growth remains weak then further monetary policy easing is likely and bond yields could fall further. This would take real interest rates into negative territory which would be positive for gold.

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Heraeus Precious Metals - Setting the PGM agenda for the years ahead

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