Gold: Vulnerable ETP holdings to test physical demand floor – Standard Chartered

Suki Cooper, Precious Metals Analyst at Standard Chartered, explains that gold prices have dipped below the 100-day moving average, implied volatility has eased towards 2005 lows and strengthening US Treasury (UST) yields are a strong downside risk for gold prices as the correlation remains intact.

Key Quotes

“10Y USTs have strengthened towards 2.40, and levels around 2.60 imply price risk towards USD 1,200/oz. This is an important level for gold: on the one hand physical demand has shown it is price-responsive and dips in prices have been met with eager purchases; but on the other hand, around 300 tonnes (t) of exchange traded products (ETP) holdings would likely become loss-making.”

“We believe that physical demand should be more responsive and limit the downside near-term as the market is already pricing in a June Fed rate hike. The hike will be the next key risk event for gold barring rising geopolitical tensions, which could reignite safe-haven flows. We have marked to market our gold price forecast, but still expect Q2-2017 to be the strongest quarter for gold.”

“Geopolitical woes have fuelled European ETP flows 

US 13F filings show that primary purchasers in recent months were a number of newcomers in the gold ETP space whose resilience has yet to be tested, as well as established holders. In Europe, ETP investor interest has held up relatively well, and the gold price in euro (EUR) and British pound (GBP) terms has outperformed USD terms. While the French election posed the highest political risk, European flows have been robust since the 2016 Brexit vote.

French legislative elections are set for 11-18 June, the UK general election will be on 8 June and the German federal election will be on 24 September. Our FX strategists expect the EUR to strengthen into year-end and as imminent risks have receded, European flows may start to slow.”