Short-covering and finance fears could boost gold

14th September 2018
Resources Rising Stars

Gold could find support as finance fears resurface and short-covering ensues, according to Thomson Reuters GFMS (reports MiningNews).

GFMS head of metals Rhona O'Connell said in a report the bear market seen so far in 2018 had been driven by the continued dollar strength due to trade wars and the crises in Turkey and Venezuela impacting emerging markets' currencies.

"Whether any of the central banks of those struggling nations have been sellers of gold - broadly unlikely in our view, but not out of the question - has had less effect on the market's sentiment than the belief, well-founded or otherwise that they might be sellers," she said.

However, she said the net short on COMEX was at a record 244 tonnes at the end of August, with outright shorts at 593t, and although some short-covering had ensued, GFMS expected more, with a "sharp short-covering rally" not being ruled out.

The spot gold price is currently around US$1197 per ounce, down from $1312.80/oz at the start of the year.

In the report, O'Connell looked back on gold's performance in the decade since Lehman Brothers collapsed on September 15, 2008 as part of the global financial meltdown.

"Given the fundamentals of the market, overall trends and specific turning points are usually driven by ‘hot money' especially in the past decade, although this knocked on in a dramatic way into the fundamental demand-side of the market, and the ramifications are still with us," she said.

Looking back, the yellow metal reached an all-time high at the time of $1000/oz in March 2008 as Bear Sterns collapsed, up from $640/oz in mid-2017, which O'Connell said was an early warning sign that gold was already pricing in the risk of trouble.

She said the $1000/oz level proved to be "overpowering for the market as a whole" and prices then slipped under disappointment at the smaller-than-expected Federal Bank funds cut of 75 basis points and the subsequent overall strengthening in the dollar.

Gold fell to $750.25/oz on September 12, but then "rallied hard" in the chaos that ensued after the Lehman collapse to reach $899/oz on September 23.

"This set the foundations for gold's three-year bull-run to peak on September 5, 2011 in the morning fix of $1896.50/oz - although intraday prices topped $1900/oz during that period," O'Connell pointed out.


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