Gold volatilities have edged lower, due to the apparent calming in spot prices for the yellow metal. The consolidation in gold was due to two developments: lower than expected investor demand for physical delivery of the August gold futures contract and increased margin requirements.
That lower demand reduced upside momentum, because it lowered the chances of a squeeze on physical inventories. Investor demand for physical delivery is still above pre-pandemic levels, but the apparent cooling in that demand suggests that investors are more wary of increasing gold exposures following the large rally since the beginning of the year.
The latest CFTC data bears this out. IMM net non-commercial futures data shows that investors have not increased their long gold positions to any extent in recent weeks. Investors still have a large long gold position, but it is not stretched or close to historical highs. This suggests that gold has not run out of buyers and that positions can be increased when the next catalyst towards higher prices manifests itself. This is unlikely to be from the US Federal Reserve in the short term, as we explain below.
At its September meeting, the Fed did not undertake further stimulus measures, and gold declined modestly to levels of around $1,880 per ounce in the days following the meeting. The lack of Fed policy action combined with little prospect of immediate fiscal stimulus in the US suggests that upside momentum is likely to wane in the short term.
Coming into October and November, there are two significant event risks for gold prices. First, if the UK and the EU do not come to a trade agreement this may lead to a decline in risk sentiment with positive consequences for gold. Second, the US presidential election is a significant event risk, and if the result of the election is disputed then gold may rise significantly. In any disputed election, the process is likely to be drawn out, and investors will flock to safe-haven assets like gold.
Global Head of Forex Strategy