Gold Vaults to Highest Levels Since October 2012; Trade Trends and Data Divergence

Gold Vaults to Highest Levels Since October 2012; Trade Trends and Data Divergence

Summary

  • Gold spot prices are again picking up the momentum with gold crossing its previous seven-year high to reach 1,773.45 (as on 24 July 2020 12:42 PM AEST).
  • The rally behind gold is well supported by the trade trends with gold-backed ETFs filling the shinning metal to the brim with a new historical high of 3,198 tonnes.
  • While the gold-backed ETFs are accumulating physical gold over glittery returns delivered by gold, Centrals banks are seeming less enthusiast with a slower q-o-q surge as compared to the previous level and an 8 per cent decline in the overall buying against the previous corresponding quarter.
  • Furthermore, the disruption in the supply chain has also supported the price with production and recycling both tumbling considerably during the first quarter of the year.
  • However, while the past data is very well explaining the glittery rally of gold, the current data is diverging.
  • Is the diverging data an early signal of any impending reversal?

Gold trades past its previous seven-year high with gold spot surging to the present high of USD 1,773.45 (as on 24 July 2020 12:42 PM AEST).

The rise in the gold prices might be coming as a surprise in the status quo with Nasdaq contouring a record high, Dow Jones Industrial Average climbing ladder fast, and demand for gold from Central Banks plunging during the first quarter of the year 2020 against its previous corresponding quarter.  

Furthermore, gold net long position is on a declining trend while the price continues to rally with open interest across gold futures surging, reflecting that large investors are not overtly bullish over the gold in the medium- to the long-run.

Also Read: Gush for Gold; How You Should Plan to Play The Consolidation?

At present, the relentless buying of the gold-backed ETFs and the supply chain disruption in the recent past amid of global travel restriction and lockdown imposed to contain the COVID-19 spread are supporting the gold prices.

As per the recent data from the World Gold Council, global holdings of gold-backed ETFs soared by 298 tonnes during the first quarter of the year 2020 to mark the highest quarterly inflow in four years. In monetary terms, the global gold-backed ETF’s asset under management (or AUM) surged by a record USD 23 billion due to a 10 per cent rise in flows along with a 6 per cent quarterly surge in the gold price.

The global gold-backed ETF holding reached a new historic high during the first quarter of the year to stand at 3,198 tonnes. However, while the investment demand from gold-backed ETFs had surged considerably during the first quarter of the year 2020, it saw reduced demand for bars and coins.

Gold-backed ETFs Inflows (Source: World Gold Council)

As per WGC data, the investment demand for bar & coins plunged by 6 per cent against the previous corresponding quarter with the highest decline observed in India and China.

While Central Banks continued to amass gold with a quarterly increase 34.38 per cent, the rate remained slower with a decline of 8 per cent in demand against the previous corresponding period (pcp) or the first quarter of the year 2019.

Central Banks Q-o-Q Purchase (Source: World Gold Council)

Furthermore, Russia finally suspended its gold purchase after accumulating over 1,900 tonnes since 2005.

The supply chain disruption is also a reason behind the gold rally apart demand from gold-backed ETFs and a slight increase in purchase from Central Banks.

Amidst of the lockdown and many national and local restrictions imposed by the governments across key mining nations, including China, South Africa, and Peru, several projects were either operational on reduced capacity or were completely halted.

The impact of these halted and partial operations, though were largely indemnified by other major mining regions that had experienced little or no disruption to normal operations, were clearly observed with a decline of 3 per cent on a y-o-y basis in the global gold production during the first quarter of the year 2020.

Apart from the mine production, the recycling activity which generates ~ 25 to 30 per cent of the global gold supply also remained largely impacted from the COVID-19 outbreak and measures implemented by governments to tackle the situation.

The global recycling production plunged by 4 per cent during the first quarter of the year 2020 on a y-o-y basis to witness its lowest level in two years.

While the production chain witnessed a decline, the corresponding logistics chain also observed headwinds, leading to a further clot in the gold supply flow.

Due to several cross-border restrictions, supply cargoes remained halted during the first three month of the year, leading to a considerable increase in the shipment fee amidst priority delivery of essential goods.

While the above-stated facts and figures could be attributed to the gold rally, the recent price performance in gold is diverging from the recently updated data.

Also Read: Gold Shatters 7-Year High, Joy Ride Coming For ASX-listed Gold Stocks?

On the data counter, there has been a divergence between the net long position on COMEX and the spot price with spot climbing higher highs and net longs witnessing lower highs, which coupled with high open interest is reflecting that institutional or large investors are currently cautious on gold.

As per the WGC, the net longs position on COMEX topped at 1,086.21 in January 2020, while money managers held ~ 75.27 per cent of the long position. The net longs position on COMEX has now reached 731.08, and money managers only represent ~ 57.71 per cent.

The share of money mangers in net longs positions on COMEX has been reduced substantially over the span of past five months with money managers holding only 421.91 longs (as on 19 June 2020) as compared to 785.4 net longs in January 2020.

COMEX Net Long (m-o-m) (Source: World Gold Council)

Furthermore, while net long positions on COMEX has been declining and the open interest standing relatively high, pointing, that the current demand for long could be easily met.

Open Interest (m-o-m) (Source: World Gold Council)

Apart from a substantial buying from the global gold-backed ETFs and supply disruption, the prevailing market sentiment and unprecedented conditions on the global front are also supporting the gold rally; however, investors should further analyse such variance in the supplementary data to further reckon the direction of the gold market ahead.

 

 

 

 


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