Commerzbank: Gold Simply Needs Spark For Short-Covering Rally
(Kitco News) - Gold is poised for a bigshort-covering rally, with the metal only needing a fresh catalyst, saidanalysts with Commerzbank in an outlook report released Friday.
The German bank said it looks forthe precious metal to reclaim $1,300 an ounce by the end of the year. As of10:09 a.m. EDT, spot metal was at $1,200.20 after a long slide from the $1,364area back in April.
Some investors may be rethinkinggold’s historical status as a safe haven, but “we wouldn’t go that far,” theanalysts said. The metal has fallen despite a number of geopolitical concerns,such as a currency crisis in Turkey and the U.S.-China trade war.
However, analysts pointed outthat when the financial crisis of 2008 first hit, gold initially lost more than$200, falling to $700 as the U.S. dollar rose. However, then gold took off,rising to $1,200 by December 2009 and $1,400 by the end of 2010.
“The [2018] drop in price islargely the result of a stronger dollar, a buoyant U.S. equity market, weak EM[emerging-market] currencies and speculative selling,” Commerzbank said.“Covering of record-high short positions would cause the gold price to surge.All it needs is a trigger, for example, a correction of equity markets or anend to USD [U.S. dollar] strength.”
The precious metal tends to moveinversely to the dollar, which has risen to its highest level in more than ayear during recent months, thereby pressuring gold.
“The dollar has reaped thebenefit of both its substantial yield advantage versus the euro and from itsrole as a safe haven,” Commerzbank said. “The latter has led to strong demandfor U.S. Treasuries so that the 10-year yield has dropped to well below the 3%mark.”
A buoyant U.S. stock market hasalso hurt gold, the bank said. Analysts said this contributed toward outflowsof 70 tonnes of gold from global exchange-traded funds during the seven weeksto mid-August.
Meanwhile, money managers had anet-short, or bearish, position of 83,324 futures contracts as of Aug. 14, themost recent data available from the Commodity Futures Trading Commission.Commerzbank pointed out that it is highly unusual for these accounts to evenhold a net-short position in the precious metal. This also means “it doesn’ttake much” to set off a sharp rally, as speculators would be forced to buy inorder to offset, or cover, their positions, the bank said.
“One possible trigger for shortcovering might be a correction on the U.S. equity market, although it wouldhave to last longer than just a couple of days,” Commerzbank said.
Another trigger could be aturnaround in the dollar. The bank’s currency strategists feel that thegreenback’s appreciation is nearing an end. In 2019, the dollar could startfalling back as the Federal Reserve nears the end of a rate-hiking cycle andthe European Central Bank gradually retreats from its ultra-loose monetarypolicy, they said.
“In our view, gold has fallen toofar,” Commerzbank said. “The current price hardly reflects the numerouspolitical and economic uncertainties prevailing. The record level ofspeculative net short positions suggests a substantial price rally before theend of the year. Given the lower starting point, we are lowering our forecastfor year-end to $1,300 per troy ounce. We still expect the price to rise in2019 to $1,500.”
By Allen SykoraFor Kitco News
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