(Bloomberg Opinion) – According to the lore of financial markets, gold is a very simple beast.
For all the complexity, a weaker dollar, volatility and lower interest rates at lower levels speak for it. A decline in the greenback mathematically increases the price of dollar-denominated commodities. Volatility makes investors prime safe-haven assets, of which gold is by far the most durable. The low interest rates reduce the attractiveness of its main competitor as a protected, high-yield government loan.
This has made the activity of wealth managers quite mysterious lately. Animal spirits appear to be returning to financial markets, boosting interest rates and dollar strength, while US House Speaker Nancy Pelosi’s visit to Taiwan threatens to trigger the biggest geopolitical crisis since Russia’s invasion of Ukraine. War Gold is up 3.9% over the past three weeks, its best performance since the eve of the Moscow war in February – it has behaved more than one would expect.
Funds don’t buy it. In data stretching back to 2006, money managers have almost always held a net long position in Chicago-traded gold futures and options, betting that more of it would rise as prices fall. In just 37 weeks out of 841, the group has relied on gold’s weakness – but that’s been happening in the past few weeks. As of July 26, its net position was less than 10,474 contracts before returning to the tight long maturity of 27,899 contracts last Tuesday. In late 2015 and 2018 (and very briefly in 2016 and early 2019), net short positions only occurred on a few occasions:
A possible explanation could be that more and more play money on the gold markets is getting into private hands. There is another group of investors from whom the US Commodity Futures Trading Commission collects data, known as “Other Reporters.” Like money managers, they make macro bets on gold, or trade spreads between the bid and ask prices rather than the physical metals business.
In contrast to them, they use their money in the form of family offices, in-house hedge funds or wealthy private clients. They are almost always on the long side of trade and have taken a larger proportion of long positions than traditional managed money funds over the past two years:
However, it is not entirely clear. While “other news items” are staying longer, they have also recaptured their net positions near their lowest bullish levels since early 2020.
Exchange traded fund holdings are moving in the same direction. The goldberg that ETF investors had amassed as a hedge against uncertainty in the wake of the Ukraine invasion is now almost wiped out:
It is possible that the difference between investor position and price action lies in the behavior of retail buyers. Jewelry typically accounts for about half of gold demand and prices aren’t particularly cheap at the moment, with trillions of savings on the brink post Covid and double-digit inflation they’re seeing better prices every day. are. Shares in Chow Tai Fook Jewelery Group Ltd., a Hong Kong jeweler with thousands of stores in mainland China and a good predictor of jewelery spending in that country, are currently closing at their highest level since November.
Despite their hefty salaries, macro hedge fund managers have far from a perfect record at predicting market direction. If you had bought gold in October 2018 and held it for 12 months when your positions were at their lowest on record, you would have ended up with a 27% return.
Nonetheless, the correlation between low interest rates at higher levels and bullish price action suggests there is something to give. For the past year, the long and strong inverse correlation between gold and US Treasury yields has been breaking down. If this relationship returns to normal, we will see either a sharp drop in interest rates or an equally large drop in the yellow metal.
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David Fickling [email protected]