Gold received an initial boost after the FOMC confirmed its dovish stance by maintaining an outlook for unchanged rates until 2024. While effectively flashing a very accommodative green light for risky assets and dollar bears, the market instead took fright from the ongoing question of whether the Fed is making a “policy mistake” in seeing the rise in longer US yields as entirely benign.
Furthermore, the market concluded that the Fed will accept both the economy and inflation to run wild, with the latter being allowed to rise and run above 2% for a prolonged period of time. While initially falling in sympathy with other asset classes, gold increasingly began attracting a bid as it tried to reestablish the reflation credentials that has been thoroughly missing for the past few months. Signs that it is having some success can be seen in the relation between gold and US 10-year real yields. On March 8, when the real yield traded at -0.6%, gold was challenging support at $1680, some 60 dollars below its current level.
While other commodities, due to elevated positioning, such as oil and grains have been left exposed to risk reduction, gold was already unloved by investors. The lack of momentum in recent months had resulted in hedge funds reducing their net long in COMEX gold futures to a near two-year low at 42k lots (4.2 million ounces), an 85% reduction from the recent peak in February 2020.
Total holdings in bullion-backed exchange-traded funds as reported by Bloomberg have seen continued reductions during the past 30 days, falling to a nine-month low at 3,144 tons, a 9% reduction from last year’s peak. One region, however, which has gone against the trend is in China where ETF holdings in February, according the World Gold Council, increased by 8 tons to a record 68.6 tons, after investors faced turmoil’s in the Chinese stock market.
For now, gold remains stuck in no man’s land and despite having seen a slight improvement in the technical outlook, that’s where it remains. For that to change and in order to attract renewed demand, especially from leveraged accounts, it needs to retake $1765/oz and until it does we maintain a short-term neutral outlook, while maintaining a medium-term bullish belief in gold’s ability to recover back towards $2000/oz.