Speculators’ Bullishness on Gold Sinks, But Prices Rally as World Equities Dive

London Gold Market Report
from Adrian Ash, BullionVault
Mon 3 June, 07:50 EST

Speculators’ Bullishness on Gold Sinks, But Prices Rally as World Equities Dive

LONDON PRICES to buy gold and silver rose in volatile trade Monday morning, recovering Friday evening’s late losses as Asian and European stock markets fell hard.

Far Eastern premiums over and above international prices continued to ease back, according to wholesale dealers.

“Bids [to buy gold] seemed to vanish into thin air,” says one, “as soon as the price got close to $1420 on Friday.”

With Turkey’s stock market losing 6% after a weekend of anti-government protests were broken up by police last night, the MSCI world index of 9,000 equities in 45 countries today reversed the last of May’s rise to 5-year highs.

Last month’s drop in US Treasury debt prices pulled global bonds to their worst monthly loss in 9 years, down 1.5% overall according to the Bank of America-Merrill Lynch Global Broad Market Index.

US Treasury yields rose Monday as prices fell further, pushing 10-year yields up to a new 1-year high of 2.17%.

“Rising yields – albeit at historically low levels – is not a friendly environment for gold,” says Swiss bank and London bullion market maker UBS in a note.

With UBS’s interest-rate analysts saying that “the rise in rates is too much, too fast,” however, the predicted drop in 10-year yields to 1.7% “would be a gold-positive development,” says the precious metals team.

“It may well act as the tailwind gold needs right now to stay northbound.”

Speculative betting on rising gold prices is now “at its lowest ebb for almost a decade,” say analysts at Deutsche Bank today. So “one could argue that the pace of liquidation is likely to slow.

“The past six months,” says Deutsche, “has seen one of the most dramatic reductions in net speculative length in gold on record.”

Latest data show what Standard Bank today calls a “massive addition to short [bearish] positions” in US gold futures and options.

Analysis of the same data by BullionVault shows that less than 60% of all directional betting on gold prices by hedge funds and other speculators is for rising prices, the lowest “bull ratio” since at least 2005.

“While gold prices may temporarily move higher in the next few years,” reckons economist and Stern School of Business professor Nouriel Roubini, “they will be very volatile and will trend lower over time as the global economy mends itself.

“The gold rush is over,” he says, forecasting $1000 gold by 2015.

Roubini called gold “a bubble” in December 2009, saying almost two years and 60% before its all-time high that the bull market would burst thanks to a rising US Dollar.

Last week saw speculative betting on a rising Dollar near record levels, according to analysts at Nomura bank, while ING bank calls it “the largest ‘long’ USD position on record.”

“The bull market is over” for developing-nation currencies, reckons SocGen strategist Kit Juckes, speaking to Bloomberg, calling the South African Rand “the first of what I suspect will be a series of dominoes to fall,” after its worst 1-month drop in two years.

Data from the Bank for International Settlements meantime show international banking flows shrinking fast at the end of 2012, with cross-border loans in the 17-nation Eurozone shrinking at a 20% annual pace.

Domestic lending by UK banks also continued to shrink in the first 3 months of this year, down by £300 million despite the coalition government’s new funding-for-lending scheme.

“Gold continues to be useful as an insurance policy in people’s portfolios to guard against uncertainty and possibly some economic dislocation,” says Michael Cuggino, manager of some $14 billion in assets at the Permanent Portfolio Family of Funds in San Francisco.

“You have a lot of monetary creation going on,” he tells Bloomberg.

“While inflation is not a current threat, that doesn’t mean it’s not a threat at some point.”

Adrian Ash