A resurgence of policy and geopolitical tensions

 

The markets could be jolted by implied bond volatility  

Recently World Gold Council [WGC] published their report, Gold Market Commentary: Positioning revisited! Key focal points said, Gold drags itself higher! Gold prices edged up 0.3% to finish July at US$3,299/oz. A stronger US dollar contributed to positive returns in all major currencies. Year-to-date, gold remains up 26%.  

Our Gold Return Attribution Model (GRAM) suggests a positive contribution from a rise in inflation expectations and tariff tensions via our geopolitical risk metric (both Risk and Uncertainty factors). Momentum factors also contributed positively, while a stronger US dollar proved a heavy drag on returns in July.  

Gold ETF inflows of US$3.2bn (23t) were split almost equally between North America (US$1.4bn, 12t) and Europe (US$1.7bn, 11t), while Asia slightly increased (US$0.1bn,0.8t) and other gold ETFs (-US$0.1bn, -1t) experienced mild outflows. COMEX managed money net longs continued to build positions following the April trough.

At the positioning revisited front, there are three points, 1: The meaningful gap between COMEX positioning and the gold price, caused largely by tariff fears, is likely to be closed by positioning rising not prices falling, in our view, 2: This is supported by key fundamentals, including: a weaker US dollar and real rate trajectories, alongside elevated market and geopolitical risks.  

3: Despite a disconnect between real rates and the gold price, COMEX investors have not disconnected and the relationship is likely to strengthen if yields drop.  

Jaws wide open, with recent attention focused firmly on central banks, gold ETFs and Chinese investors, we thought it worthwhile to revisit what the so-called ‘fast money’ positioning on Comex is telling us. One would think that given where gold prices are, investors would be loaded to the gills. We know this not to be the case as a share of overall portfolios, but it doesn’t appear to be the case in absolute terms either.   

Gas left in the tank means, Comex futures investors have recovered some of this lost ground, but this reset leaves us with the view that they have capacity to rebuild positions – a sentiment echoed for ETF investors in our Mid-Year Outlook. One proviso is that fundamentals support that buying, and we think they do; I: A structurally weaker US dollar is one key factor, backed by a strong case and consensus view, notwithstanding a possible near-term short squeeze given how crowded the trade is.  

II: Added to that, risk perception remains elevated. Despite the current lull, the markets could be jolted by implied bond volatility or a resurgence of policy and geopolitical tensions. III: Lower policy rates should also be a catalyst. But would that also lead to lower bond yields, particularly real ones – the bit that’s empirically more important for gold? After all, if they haven’t mattered on the way up, will they really matter on the way down?