2011-06-21

Gold - Believe that it will reach $1,600 in Q4:11

The latest CFTC data, which captures events up to Tuesday last week, indicates that non-commercial interest in gold has declined. Non-commercial long positions stood at 825 tonnes
last week (down 28 tonnes from the previous week). Short non-commercial positions increased by only 2 tonnes, to 112 tonnes, leaving the net speculative position at 713 tonnes, a decrease of 30 tonnes w/w. The current net speculative position is well off the highs of 911 tonnes reached last year May.

In fact, looking at the future market, the current positioning indicates a market in which investor sentiment has been drifting along without extreme bullish or bearish positioning. This is demonstrated by the net speculative position as a percentage of open interest, which is at 30.8%, marginally down from 31.7% last week. This number was as high as 42% in 2009 and as low as 23% in February 2011. ETF gold holdings has risen by 9 tonnes last week, explaining some of the short-term movement higher in the gold price. But a 9 tonne rise in ETF holdings is not massive, and unlikely to move the gold price much. Furthermore, gold ETF holdings remain below the highs of 2,114 tonnes reached late in 2010. So, although ETF gold holdings have provided upward support in recent days, the effect has been largely neutral since June 2010.

Despite the futures market not being overly bullish on gold, and ETF holdings having been largely neutral since mid-2010, the gold price is still grinding higher. Much of this support
seems to be coming from the physical gold market, especially Asia. This segment of the gold market has been buying gold in dips for the past few weeks, and this trend seems entrenched. In fact, we have seen exceptionally strong physical gold demand so far this year (compared to the same periods in 2009 and 2010). We believe that this will provide support for gold on dips. We therefore still favour a long position in gold, and believe that it will reach $1,600 in Q4:11.

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