Gold Price Risks: 'Extremely Extended' Positioning, Powell at Jackson Hole - TD Securities
(Kitco News) - One of the biggest gold price risks at the moment is the metal’s “extremely extended positioning,” said TD Securities. But, could the Federal Reserve Chair Jerome Powell’s Jackson Hole speech make things worse and trigger a selloff?
The yellow metal is managing to trade just north of the new key psychological level of $1,500 an ounce this week while risk-on sentiment recovers in the marketplace.
Whether or not gold can extend its rally further after Powell’s Jackson Hole speech on Friday will be “the moment of truth for gold bugs,” wrote strategists at TD Securities on Monday.
“Many market participants including ourselves have pointed to the extremely extended positioning as a risk factor to this rally,” the strategists said. The question now is whether a selloff in gold is in the cards this month, they added.
“Global market participants embarked on a dramatic search for safe assets which saw the pile of negative-yielding debt grow north of $16T, which inverted the US 2-10 curve, leading to a surge in equity volatility, and saw the yield on U.S. 30y bonds hit its lowest levels on record. In this context, can we expect a reversal in global yields that could prompt a sharp correction in gold?” the report said.
The market is currently expecting the Fed to cut rates by another 60 basis points this year, which is why “Powell may be stuck in a (Jackson) hole” come Friday, said TD Securities.
“Our rates strategists note that the Committee is divided on the outlook for rates and the impact of weak global growth and trade uncertainty on the U.S. remains uncertain. Further, even though the yield curve has inverted, the S&P is a few percentage points off the highs and CDX IG is only 10bp wider this month,” the strategists wrote. “Financial conditions have not tightened materially — which may embolden the Fed to stay the course and ultimately may be setting markets up for a disappointment this week.”
Yet, this disappointment in the short-term might end up saving the gold bugs in the long-term, the bank added.
“Considering bloated easing expectations and the extremely extended long positioning, it would also subsequently tighten financial conditions — which could force the Fed’s hand in creating the conditions necessary to ease further in the following meeting. And, should the tighter financial conditions or global growth woes see U.S. macroeconomic data take a turn for the worst, we suspect that it won’t be long before U.S. equity volatility rises, leading to a resumption in portfolio flows towards safe-haven assets like gold,” the bank’s strategists wrote.