Hedge funds pared their long futures and options positioning on gold to the lowest level since July in the week to 15 October according to CFTC data. That comes amid greater investor optimism after recent signs of progress toward an interim US-China trade agreement and a Brexit deal.
Gold is now trading at USD 1,485/oz, having struggled to stay meaningfully above USD 1,500/oz since August when trade tensions escalated again. But we think the primary drivers behind its rally this year are still intact:
* We see global economic growth slowing to 3% next year, its slowest pace since the global financial crisis. While our base case is for the US economy to avoid a recession, recent weak economic data (industrial production, retail sales) has exacerbated growth concerns. This uncertain economic backdrop should support safe-haven assets.
* With the Federal Reserve likely to reduce its policy rate over the coming months (we expect four 25 basis point cuts by the end of next year), and other central banks also easing, real rates should stay low, making gold attractive on a relative basis.
* Central banks have been purchasing gold, and we anticipate that they will remain net buyers. According to its website, the People’s Bank of China (PBoC) bought 5.9 tonnes of the precious metal in September, and in total has added more than 100 tonnes since it resumed purchases last December. Central bank purchases last year reached their high point since 1971, when the US left the gold standard, according to World Gold Council data.
* It's also worth noting that ETF holdings continue to increase, having reached roughly 82m ounces according to Bloomberg data. Their rise stems more from long-term oriented investors, while futures and options positioning is being driven more by short-term oriented and speculative investors.
Against this backdrop, our forecasts for the gold price are USD 1,550/oz at end-4Q19, USD 1,600/oz at end-1Q20 and end-2Q20, and USD 1,650/oz at end-3Q20. If a trade deal between the US and China is reached in the near term, which is not our base case, the potential for further gold gains would fall, in our view.