Resilient gold market defies lower rate cut predictions

Gold continues to grind higher with the current level around $2035 reducing the monthly loss to just 1%, an impressive performance during a month that has seen US rate cut expectations deflate from six to near three with the first not fully priced in before July. These developments have seen US 10-year yields rise by more than 35 bps to 4.28% while the 2-year yield has jumped by 51 bps to 4.72%, thereby sharply raising the opportunity cost of holding a non-yielding position in gold. 

The rising cost of carry together with the market's obsession with AI-related stocks, potentially driving a false sense of stability across markets, have seen paper demand for gold continue to crumble with total holdings in bullion-backed ETFs down 44 tons this month, and 95 tons so far this year. Against these headwinds, support has been led by a softer dollar and speculators covering short positions that was initiated at the start of the month when gold briefly broke below $2000. 

The US CFTC in their latest Commitments of Traders report covering the week to February 20, showed speculators increased their net long position in COMEX gold futures by 18k contracts (1.8 million ounces or 51 tons) to 64k contracts, the vast majority of which was driven by a 17k contract reduction in the gross short from wrong-footed short sellers. This rinse and repeat action from speculators selling into weakness, and buying into strength has been the prevailing behavior since December during which time gold has been trading within a narrowing range.

Turning our attention to investors' positions in silver we find a similar pattern with total ETF holdings down 437 tons to 21,407 tons on the month so far, its worst monthly withdrawal since last July. Managed money accounts, meanwhile, remain much more receptive to short-term price developments, and just like gold they have been struggling recently, with the lack of momentum leading them to buy highs and sell lows. Weakness at the start of the month saw funds enter net short positions in COMEX silver futures, only to be forced to flip back to a net long in the week to February 20, when a gold and industrial metal bounce supported higher prices.