Since the beginning of 2020, the price of gold has risen by just over 3 percent, just temporarily exceeding USD 1,600 per ounce. The strong price increase in the first half of January met with a very strong supply action, which seems to reject values above the mentioned USD 1,600 level. Hence, it is worth considering who else might want to raise the price of gold?
If we look back a year, gold has seen a significant increase in value, since from February 2019 to now it has grown by almost 20 percent, which seemed to make gold one of the better investments at that time. Demand was so high that records were set in at least two products based on the price of gold. The first of these is ETFs. Units of these funds are listed and traded on a stock exchange, and when investors decide to buy them, the fund acquires physical gold and then stores it. In other words, ETFs are gold-backed securities. In 2019, the amount of gold held by ETFs increased by 14 percent, setting new record levels. Global ETFs had USD 19.2 billion net inflows last year, equivalent to 400 tonnes of gold. In total, the funds held around 2,900 tonnes of gold in the fourth quarter, which is a new record.
The second market that was very popular among investors was the futures market. According to CFTC data, net long positions among non-commercial investors have increased since 2019 from 99 thousand contracts up to over 330 thousand at the end of January 2020. This is the highest level of reported contracts in history. Of course, on the futures market, new contracts can be created and the levels of overbought or oversold areas are very relative, but the popularity of investments based on rising gold prices is huge. This, in turn, can turn on at least yellow warning light. What is also important is the fact that while net positions increased to 330 thousand there is no new high in the price of gold.
So, if retail and institutional investors in the ETFs and futures market have already eagerly bought instruments based on further price increases, are there still many willing to continue buying them? This is a certain threat to the long squeeze phenomenon, which could potentially bring the gold price of at least USD 100 per ounce below the current price in the short term. In other words, after the rush of buying gold-based products, this market seems to need at least a short-term cooling.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
60% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trade this news from Conotoxia Ltd. platforms
Go to your account
