Wednesday, October 3, 2012

As real rates hit another record low, speculative gold positions spike

Gold is beginning to see significant speculative inflows, as increasing numbers of traders bet on Fed continuing aggressive easing programs in perpetuity and on the resulting dollar weakness. The impending Obama victory (see discussion) also provides some support for gold.
Bloomberg: - Speculators increased their net long position in gold by 13,346 contracts to 234,613 contracts. That was 2.4 standard deviations above the one year average.

Spec traders net positions in gold futures

The retail participation in gold has also been on the rise, as gold ETFs see inflows. For example the ETFS Gold Trust (SGOL) which holds physical gold bars in Switzerland - something many retail investors prefer - has seen significant inflows.

Shares outstanding of SGOL (Bloomberg)

One of the reasons some find the long gold position attractive these days (in addition to QE3) is that the opportunity cost of holding gold is extremely low. With negative - and declining - real interest rates in the US, investors are expected to lose money being long cash or treasuries (even long-term treasuries - see chart below). Gold therefore becomes more attractive relative to fixed income products. Nevertheless, for those with exposure to gold, the rise in speculative activity is something that needs to be monitored closely.

Real 10y-zero coupon treasury yield (Bloomberg)





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