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Recessionary mindset drives gold futures and ETFs to record levels

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Gold is still very much on the investor agenda with the gold futures market at 346,000 net long contracts this week, says Nitesh Shah, director – research at WisdomTree.

“Gold could rise to over USD1800 an ounce if geopolitical risks remain elevated,” Shah says, and holds a base case forecast for USD1550/oz in Q2 2020. The forecast is based on US 10-year Treasury yields and the US dollar basket holding around current levels at 1.65 per cent and 97 respectively.
 

“However, should geopolitical concerns deteriorate further, speculative positioning could rise even more. If positioning were to rise to 400k contracts net long, our model indicates gold prices could rise to USD1875/oz – a whisker away from the all-time high gold price of USD1900/oz set on 5 September 2011,” Shah says.

The long quiet summer months have not been reflected in the activities that have driven gold up to a position where, Shah says, ‘it could be one of our favourite friends by the end of the year’.

WisdomTree’s gold ETF Flows have been very strong this year-to-date at over USD1.3 billion. “The AUM are growing with the price increase,” Shah says. “Investors are driven to gold because of price momentum and also a very sharp decline in Treasury yields in recent months.”

A year ago, he points out, Treasury yields were at 3 per cent and now sit at 1.55 due to expectations of action from the Federal Reserve on the monetary policy front. “The sentiment towards gold has risen substantially in the last month or so,” he says.

“People expect the gold price to rise and are adding gold to their portfolios as a hedge against worse case outcomes in terms of the trade war and other related fears.”

The doom story is falling into place with fear of recession on the back of a trade war, concerns in the Middle East with Iran having violated its nuclear accord with remaining signatories plus the intermittent attacks around the Straits of Hormuz and a drone attack in Saudi Arabia.

Outside of the US, Europe has economic concerns with the UK and Germany posting negative GDP figures and Argentina going into crisis again, which, on the last occasion sparked off an emerging market sell off.

“The futures’ market positioning and ETF flows are at an all time high in tandem,” Shah says. “Last year, we had strong ETF flows but futures positioning was negative, but now they are in step.”

Hitting and even beating that all time high gold price would take a lot of doing, Shah believes, but he would never rule it out. “It would require positioning outside of the history of the model and also dollar depreciation but one of the things is that these elements of geopolitical risk haven’t been seen in a long time.”

Shah believes that if we get into a position where risks like those last seen just before the 2008 global financial crash were to line up, the world’s monetary and fiscal powers might not be able to – or want to – unite and deal with it.

“China already looks very indebted and could they or would they want to take on more debt?” he asks. “There are lots of questions which will be pondered over in the coming weeks as to how to navigate through a potential future crisis,” Shah says. “There has been this sudden shift to a recessionary mindset which has taken people by surprise, and with the lack of answers to these questions, we expect gold to continue to be used as a safe haven asset which allows investors to hedge against these risks.”
 
 
 

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