Gold Could Experience Mother-Of-All Short Covering

Naeem Aslam
Written by Naeem Aslam
An employee arranges one-kilogram gold bars at a mint refinery in Australia. Photographer: Carla Gottgens/Bloomberg

Gold is back under the spotlight because of the renewed appetite amidst traders. This is primarily because of the rising geopolitical tensions and worries over the slowing global economic growth. The gold price traded near a two-and-a-half-month peak last week and is at $1,227 at the time of writing. Year to date, the price is down nearly 5.18%.

At the start of the year, gold was trading near $1,350 and hit the highest point of $1,366 on Jan. 25, 2018. Not many in the street were expecting the Fed to be aggressive with their monetary policy. However, the strength in the economic data and the robust growth in the U.S. economy made the Fed fine-tune their monetary policy. The hawkish stance towards their monetary policy pushed the dollar index higher and this triggered the sell-off in gold.

In other words, since January the price of gold has been out of luck and we have seen a clear downward trend. On August 16th, 2018, the yellow metal made a low of $1,160 but since then we have seen some serious changes in the price action because of the change in the underlying fundamentals. Anxieties around the trade war started to impact the sentiment and this triggered a profit warning by Wall Street analysts. On top of this, we also had the International Monetary Fund (IMF) coming out with a downward revision of the global economic growth. The bearish sentiment since then has picked up strength and many more hedge fund analysts have started to believe that there are more chances for a serious correction than a bull run.

On top of this, there are heightened geopolitical tensions between Saudi Arabia and the West due to the killing of journalist Jamal Khashoggi. This has put traders off from loading up major risk on bets in their portfolio. The situation is serious, and this has brought the special relation between Donald Trump and Saudi Crown Prince Mohammed Bin Salman under the spotlight. These geopolitical tensions are further anchored when we look at the mess created by Theresa May over Brexit. Italian budget woes just add the cherry on top . Simply put, the geopolitical tensions have started to make investors seriously worried about their portfolios and if we factor in the growth concerns over in China, it becomes clear why speculators have started to scale back from their short positions.

The recent CFTC data showed that hedge funds have decided that it is about time for them to start scaling back from their short position. This sends a strong bullish signal for the metal. This capitulation factor could intensify even further, should the Fed have a change of heart about their hawkish monetary policy. After all, Donald Trump has criticised the Fed several times about hiking the interest rate so many times this year. It is important to emphasise that back in 2015, when speculators had net long positions, it triggered a 30% move in the gold price. A similar move would help the price move to $1,500.

Speculators have reduced their short gold positions and this could trigger a bull rally for gold.SOURCE: BLOOMBERG, THINKMARKETS. TWITTER: @NAEEMASLAM23

An equally important fact, worth mentioning at this point, is that the gold price has been gaining traction while the dollar index maintained its strength. During the past few weeks, we have seen a positive correlation between the dollar index and the gold price. This shows that gold and the dollar are moving in the same direction. This shows that the gold price is immune to the dollar effect now.



This article originally appeared in Forbes.