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Rise In ETF Holdings, CFTC Speculative Positioning Underscore Investment Interest In Gold
By Debbie Carlson Kitco NewsThursday July 10, 2014 11:55 AM
(Kitco News) - Gold prices are at their highest level since mid-March, with investment demand giving the yellow metal a boost in the absence of physical demand.
Holding in the SPDR Gold Trust ETF (NYSE: GLD) as of July 9 were at 800.28 metric tons, their highest since April 15 when tonnage stood at 806.22. They are also fractionally higher than where gold holdings started the year, 794.62 as of Jan. 2
This coincides with rising speculative fund holdings as measured by the Commodity Futures Trading Commission. As of July 1, large speculators in the disaggregated version of the report had a net-long position of 136,929 contracts, just shy of the March 18 figure of 138,429. In the legacy report, the large speculators had a net-long position of 168,305 contracts as of July 1, which is the highest since the March 18 figure of 172,204.
As of 11:38 a.m. EDT, August Comex gold prices were around $1,338.50 an ounce. Comparatively, on March 18 settled at $1,359.40 and on April 15 they settled at $1,300.50.
Analysts said several events are driving the investment demand and giving the yellow metal a floor at a time when physical demand, particularly from powerhouse buyers China and India, has been lackluster.
“I think a lot of people are somewhat nervous about the uncertainty of political events and … the impact on economic prospects, and about inflation. Whether those assumptions are right remains to be seen,” said Stephen Platt, senior account executive with Archer Financial Services. “I think that may have been (one) factor for some of the equity sell-off we’ve seen here recently, given some of the events in Israel and the Mideast, etc.”
Geopolitical concerns have been a mainstay in the gold market in recent months, whether it is concerns about Russia’s annexation of Crimea and other saber-rattling along the Ukrainian border, military insurgents taking over some cities in Iraq, and most recently, skirmishes between Israel and Hamas.
Platt said the geopolitical factors have had an impact in the energy markets, which also has economic considerations. However, he pointed out, with the U.S. pumping more oil recently, the U.S. is relying “less and less” on some Mideast oil production. Even so, Platt said, “people still react to those event and feel that they can provoke a pretty good level of investment demand back into the gold.”
Dominick Cimaglia, senior dealer at Alliance Financial, said the rise in the gold ETF makes sense for retail traders who might want to take a short-term chance on higher gold prices.
“Simply put, it’s so much easier to trade the GLD. You go buy the ETF at a tenth of an ounce and a retail person can buy five, 10 shares. That’s equivalent to an ounce,” he said.
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Conversely, on the physical side, he said, retail buyers may have to pay up to a 6% premium over spot price, which means they have to make that much on their investment to just break even. “It’s much cheaper to pay the management fee on the ETF,” Cimaglia said.
Platt said investors may have sought out gold recently on the idea that when prices fell to around $1,300, it was a relative value versus adding to equity positions that have held at record highs.
Although gold prices are trading at their mid-March highs based on investment demand, Platt and Cimaglia said the market remains within a larger trading range when looking at technical charts.
“Gold is in a trading range which has really persisted since 2013, for over a year. The market is testing some pretty key areas here. The test is going to be whether we can get through the $1,355-60 area on the upside. If do in fact fail we could see this market drift back down to the $1,300-20 area,” Platt said.
Cimaglia is also a bit wary in part because the investment demand is not being accompanied by physical demand.
Platt said the sustainability of the gold price rally will depend on equities more than anything else.
“It’s going to be contingent on the stock market. In terms of inflationary pressures, I don’t see them as pronounced,” he said.
By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco
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