Gold challenging resistance as equities drop

Central bank buying continues

China bought gold for a fifth consecutive month in April. The 14.9-ton increase was the largest since 2016 and it took the year-to-April total to 57.9 tons. As I said in an interview with Bloomberg yesterday:  “banks' buying is the underlying demand story which continues to develop from central banks seeking to de-dollarise their reserves [...] what is missing for gold to move higher is a pickup in paper demand through futures and ETFs. Something that will happen if stocks run into a prolonged period of profit-taking and/or the dollar stabilises”.

Paper demand the missing link

Until now, paper demand has been mostly negative with total holdings in bullion-backed ETFs having seen continued reductions this year. This is in line with the continued rise in stocks, which reduced the need for safe-haven buying and diversification. Hedge funds, who are much more price-sensitive, chased the market during this period; in the week to April 30. gold was bought to the tune of 33k lots, making it the second-biggest week of buying this year.

The move returned the position to a net-long and highlighted the continued struggle for direction. However, a break to the upside would force another round of buying from momentum and technical trading funds as they are forced to rebuild a bullish exposure to the market. 

Keep an eye on volatility

As I highlighted in a tweet yesterday, it is important to keep an eye on the VIX index. The May future jumped above 17% yesterday and that resulted in more than half of the record short position (180k lots on April 30) moving into loss-making territory. With the net-short representing 40% of the total open interest of the futures contract versus 26% during the last peak, the market has been left exposed to additional short-covering if the uncertainty rises further.