- Despite gold rising almost 4% over the past three weeks, fund managers just aren’t buying bullion.
- In recent weeks, net shorts on gold have exceeded net longs, which has only happened on a handful of occasions previously.
In the Battle of Waterloo, British financier Nathan Rothschild of the Rothschild banking dynasty bet that the war between the British and the French would be a long-drawn-out affair, betting his fortune on the price of gold going upwards.
Unfortunately for Rothschild, the efficacy of the British attack and the late arrival of the Prussian army all but sealed the fate of the French and their leader, Napoleon Bonaparte.
In similar fashion, a weak dollar, turmoil, and lower interest rates are all factors that support the argument for an investment in gold.
But just like Rothschild, investors betting that the prolonged Russian invasion of Ukraine would lead to broader geopolitical instability and a heightened demand for bullion have thus far been disappointed.
Typically, falls in the value of the dollar raise the price of dollar-denominated commodities, including gold and things like war make investors head for safe haven assets, of which gold is by far the oldest, dating back to ancient Mesopotamia.
Yet somehow, despite gold rising almost 4% over the past three weeks, driven by a confluence of lower rate hike expectations and the threat of greater geopolitical tension in the South China Sea, with a possible standoff between the U.S. and China, fund managers just aren’t buying bullion.
In data going back to 2006, money managers have almost always had net long positions in gold futures and options traded in Chicago, with more betting that prices will rise rather than fall – a hedge against uncertain times in an ever-changing landscape.
But in recent weeks, net shorts on gold have exceeded net longs, which has only happened on a handful of occasions previously.
Holdings by gold ETFs have been on the decline and despite a run-up in the wake of Russia’s invasion of Ukraine, those gains have now faded to almost nothing.
Appetite for gold by Asian investors, whether of jewelry or as a store of value has also been on the decline.
With jewelry accounting for about half of overall gold demand and trillions of dollars sitting in post-Covid savings in Asian bank accounts, high inflation could provide the trigger for a resurgence in the precious metal.
But higher interest rates could also be the catalyst for a precipitous fall in gold prices as well.
Gold is sitting at a turning point, and something is about to give, which means strategically-placed bets on the gold, depending on the outlook for the dollar, could either see bullion rebound to US$2,000, or fall even lower.
