Gold has continued to trade around the $1,200 mark despite the fact that holdings in bullion-backed ETFs have dropped to their lowest all year.
Gold is currently trading at $1,195 per ounce with December gold futures trading at $1,199.
A slight decline in the value of the dollar index over the weekend may have offset a similar decline in the price of gold, but it’s likely that the market simply awaits the results of a two-day Federal Reserve meeting due to end on Wednesday which is bound to spell changes for the price of gold.
Market experts are expecting a rate hike of a quarter point, and it’s often believed that higher interest rates drive investors to fixed income investments like bonds as opposed to gold.
“Gold has remained range-bound around $1,200 for the past month during which time it has managed to absorb continued selling from futures and ETF investors,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S.
“It does indicate that some underlying demand has begun to emerge but in order for the price to progress to a point where short sellers begin to worry, it needs additional support from a combination of a weaker dollar and lower stocks.”
The price of gold has indeed traded in a narrow range of just $31 in the past month, with a high of $1,214.35 and low of $1,182.86. A report from the CFTC’s disaggregated Commitments of Traders report showed that at the week’s end of September 18, 2,689 long positions in Comex gold futures were dropped while 4,555 short positions were opened leaving a total of 97,904 long and 180,367 short or 82,647 net-short.
Gold has maintained a strong line of support at the $1,200, edging higher over the last few days despite the selling pressure, with many possible factors influencing the price action.
Federal Reserve Meeting
The Fed meeting could prove a significant factor in the price of gold over the coming days and weeks.
The Fed hinted after the March meeting that a more aggressive policy stance may be incoming for 2018/19 with Fed Chairman Jerome Powell confirming that the Fed is still favoring accommodative interest rates over neutral, and it seems likely that the results of Wednesday’s meeting will be another rate hike.
“Overall, the incoming data on wage growth, inflation and economic activity all support the Fed’s plan to raise interest rates two more times this year,” says Ryan Sweet, director of real-time economics at Moody’s Analytics.
Sweet also stated that economic crises in areas like Venezuela and Turkey may have a destabilizing effect on the US banking system and economy, with raised interest rates being one way to provide support for the US dollar.
One anomaly in the current gold market is the activity seen by commercial traders. Many analysts are now turning their attention from the short-term money manager positions to the commercial positions which are net-long for the first time in 17 years.
Typically, when gold has rallied the commercial traders are short and money managers are long on gold - commercials often trigger a price decline that breaks levels of support and then as managers sell due to falling prices, commercial traders buy to cover their short positions.
When those positions drop low, gold rallies in what is often known as the rinse and wash cycle. However, commercials are now long, and given that commercial traders are often seen as controlling the ‘smart money,’ many analysts will view as a bullish signal.
Trade War with China
The US administration began imposing tariffs on Chinese trade in July following months of tariffs on other countries and products. This coincided with a pre-existing decline in the CNY to USD exchange rate which continued to drop following the tariffs, essentially offsetting their effect.
To maintain the CNY to gold peg, China began using its USD reserves to buy gold which is typically priced in USD. Maintaining the peg enables China to continue making yuan-based oil purchases, and as such creates a heightened demand for gold in China.
China has almost purchased 500 tonnes of gold already in Q2 of 2018, making the current rate of demand the highest since 2013.
Time Will Tell
The results of the Wednesday Fed meeting looks set to have the most immediate impact of gold which for now remains firmly rangebound.
Rate hikes are often considered to negatively influence the price action of gold due to the inverse relationship between the value of the USD and gold. However, the stability of the price despite the recent price-negative news like ETF volume decreasing may bode well for the future, with Bloomberg’s weekly survey of gold traders and analysts reporting a majority bullish stance on the upcoming price action.