Hedge funds speculate on gold price drop

Gold prices recently fell to their lowest level in more than a year and a half, but hedge funds expect that the price will fall even further in the near future. The latest figures from the Commodity Futures Trading Commission (CFTC), the American regulator for the financial markets, show that hedge funds have never been as negative about the precious metal in the last ten years as they are now.

Hedge funds' short positions rose to a record 78,579 contracts this week, meaning hedge funds are anticipating a further decline in the Gold price. It was the fifth week in a row that they strengthened their short position in the precious metal. In the same period, the price of the precious metal went down.

Hedge funds speculate on further decline in gold prices (Source: Bloomberg)

Gold price under pressure

The gold price has been under pressure in recent months due to the strong dollar and the expectation that the Federal Reserve will continue with its planned interest rate hikes. The U.S. economy is also showing strong growth rates, causing investors to leave the precious metal's safe haven. Even the looming trade war and ongoing geopolitical tensions have not yet had a positive impact on the price of the precious metal.

All in all, the story for gold seems quite negative at the moment, but at the same time, we can also see the behavior of hedge funds as a contrarian indicator. The last time hedge funds were very negative was at the end of 2015. In the months that followed, a powerful recovery rally followed, with the price of gold skyrocketing by more than ten percent in a matter of weeks.

Bottom in sight?

Analyst Georgette Boele of ABN Amro expected that the price of gold will soon reach a bottom. Weakness in the dollar could put an end to the downward trend and could result in speculators having to hedge their short positions. To do so, they need to Buy gold And that, in turn, drives up the price.

The World Gold Council, in a new report other effects that could be positive for the precious metal. They expect bargain hunters to get back in at the current rate, especially when the festival season starts again in India. Also, savers in countries such as Turkey and Iran will seek refuge in precious metals as a hedge against the depreciation of their own currency.

Disclaimer: Holland Gold does not provide investment advice and this article should not be read as such. Investing involves risk, and past performance is no guarantee of future results.

This contribution was made from Geotrendlines