Steady support for gold intact

According to last week’s CFTC data, gold’s net speculative length remains largely unchanged w/w. The futures market positioning remains largely natural for gold. However, we still see gold’s bias to the upside on a 12-month basis. Last week, COMEX non-commercial longs in gold increased by13 tonnes, from 788 tonnes to 801 tonnes. The shorts have increased by a mere 2 tonnes, to 113 tonnes. The net non-commercial, or speculative position currently stands at
688 tonnes, still well below the 800 tonnes plus of Q3:10.

The speculative position as a percentage of open interest (OI) is at 31.8%, in line with the average level of 33% over the past two years. We believe that the current speculative length reflects gold’s range-bound trade ($1,400 to $1,450) over the past two months. While the futures market is not overly bullish on gold, the physical market is still a steady buyer of gold. This buying interest is not exceptionally strong but certainly persistent.

Also, the physical market is once again adjusting to a higher gold price — which we view as bullish. Before March, we were unlikely to see much buying above $1,400. Now, we see increased buying whenever gold dips towards $1,400. Tactically, we see good value in gold below $1,385. At the moment, gold looks overbought above $1,450. This trading range could well prevail for most of Q2:11 until seasonal jewellery demand improves in Q3:11. Our strategic view remains unchanged: we maintain that gold will push higher in 2011. We still target $1,500 for Q3:11.

Core to our strategic view on gold is global liquidity and real interest rates — we view these as the casual long-term drivers of gold. Real interest rates remain exceptionally low. As far as liquidity is concerned, we measure global liquidity as the Fed's balance sheet plus global FX reserve holdings. Therefore, if the Fed contracts its balance sheet by 5%, global liquidity declines by only 1.5%. Any decline in the Fed’s balance sheet is negative for gold. However, we also
note the other component in our measure of global liquidity — FX reserve holdings — is likely to grow as long as governments in major economies need to borrow. In fact, global FX reserve holdings are up 3.5% YTD. Our strategic view is unchanged: we believe that gold will
push higher in 2011 and we still target $1,500 for Q3:11.


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