Recent developments in international trade relations have taken a dramatic turn, representing a near complete reversal of previous trends, according to Daniel Ghali, Senior Commodity Strategist at TDS. This shift has significant implications for the gold market.
Gold bears need $3050 break for CTA liquidation
“This situation represents a challenge on both fronts of our framework, which identifies the primary drivers of buying activity in gold markets,” Ghali explains. “Eastern investors are primarily concerned with currency depreciation, while Western investors are more focused on recessionary or stagflationary risks. The recent positive developments in trade significantly alleviate both of these concerns. Consequently, gold markets are likely to experience reduced buying activity in the coming weeks. However, we anticipate that prices will demonstrate a surprising degree of resilience, supported by underlying factors.”
“Specifically, Commodity Trading Advisors (CTAs) are unlikely to significantly reduce their gold exposure unless there is a substantial drawdown towards $3050 per ounce. Discretionary traders and macro funds currently hold net flat positions in gold, indicating a neutral stance. Furthermore, a considerable portion of the recent increase in Exchange Traded Fund (ETF) holdings is attributable to a shift in institutional investors’ strategic asset allocations, a trend that is unlikely to reverse in the short to medium term. This suggests a degree of stickiness in current gold holdings.”
“Unless macro funds establish a noteworthy net short position, the most vulnerable groups to potential selling pressure are Western retail ETF holders and Chinese ETF holders. However, central bank buying activity is expected to remain robust, providing a substantial counterbalance to any potential selling from these sources. The most adverse scenario for gold played out less than 24 hours ago, and signs of selling exhaustion are already emerging. Therefore, capitalizing on downside opportunities through strategic selling appears to be the most appropriate approach in the current market environment. This strategy acknowledges the potential for further price declines while recognizing the underlying support factors that could limit the extent of any such declines. Investors should closely monitor macroeconomic data releases, particularly inflation figures and GDP growth, as these will influence central bank policy and, consequently, gold market dynamics.”
