Precious moments: Gold asserts its role as the risk hedge, breaches $2000 mark

Gold has reasserted its position as a robust risk hedge crossing the $2,000 per ounce mark today. The weekend announcement of a planned production cut by OPEC and others prompted a six per cent spike in the oil price to $80 per barrel which, all things being equal, could reignite inflation fears, the expectation of higher interest rates for longer, and risks of slower economic growth.

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This did not spook the gold price, last above $2,000 per ounce in August 2020 when markets were captivated by Covid fears. Gold is demonstrating its role as a hedge against uncertainty in the economy and financial markets. The chart shows how the gold price is now positively correlated with the VIX, Wall Street’s fear index.

Gold and the VIX Uncertainty index

Source: Bloomberg, StoneX.

Gold has essentially been range-trading for the past fortnight but is finding chart support above $1960 while generating a triangle formation. Often, when one or other of the trend lines bounding this formation is broken and as we approach the apex (targeted at $1,992 in early April), the price will move by an amount equivalent to the width of the base of the triangle – in this case, by as much as $74 (in either direction!) Above the $2,000 mark we’re in new territory.

Other fundamentals have been supportive for the gold price. Exchange Traded funds added 35 tonnes of gold into the major funds (1.2% of total) for a net dollar inflow of $2.27 billion in the ten days following the SVB collapse and Credit Suisse implosion; the past week has seen a further nine tonnes of net inflows, for a total of 3,441 tonnes (for context, world mine production is around 4,000 tonnes per annum).

The Commodity Futures Trading Commission (CTFC) report for activity last week saw an additional 17 tonnes in long positions and short covering, with short positions contracting to by 39 tonnes to 98 tonnes, the lowest from June 2020. The net long position of 308 tonnes compares with a twelve-month average of 111 tonnes. In our view, this makes the market vulnerable to long liquidation on any bad news or change in sentiment.

There has also been a surge in purchases of US Gold Eagle coins during March, likely to be directly attributable to the banking issues. For the full month Gold Eagle sales were to 6.7 tonnes, for an approximate investment (contained gold, excluding premia) of $423 million, above the average monthly spending of around $100 million for the past four years, and higher than the seasonally strong January level.

Taken from analysis by Rhona O’Connell, Head of Commodity Market Analysis for EMEA & Asia, StoneX Financial Ltd.

Contact: Rhona.Oconnell@stonex.com.