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Gold Gets 'Too Hot Short Term', Physical Demand Hit by Comex, SHFE Options Trading
GOLD TRADING held the price of bullion around $2380 per Troy ounce on Thursday, some $50 below last week's new all-time high as analysts from Shanghai to New York warned about 'momentum' traders divorcing the market's price from its supply-and-demand fundamentals. "Gold is too hot," says the China Securities Journal, quoting investment advisory Qiebuo.
"In the short term, 'up' is the best reason for rising prices. Gold's short-term departure from fundamentals is being affected by heavy trading."
"Greed's a term that I wouldn't necessarily use," says bullion bank HSBC's gold-market analyst James Steel, speaking to Finance Yahoo and suggesting that for fund managers hedging their exposure to US equities with a position in gold derivatives, the precious metal "has proven a safe haven."
China's CSI300 index today extended its bounce from February's half-decade lows, but held 14.2% lower from this time last year.
New York stock-market futures also opened slightly higher on Thursday after the S&P500 index closed last night at an 8-week low, down 4.6% from end-March's record high.
But for gold, says Steel at HSBC, "I think what we've seen is signals that have brought in a lot of momentum traders. The market's gone to record highs in nominal terms. And I think that's where we have to be somewhat concerned [because] if we get some days where things are static, we could easily get a pullback in the price."
Last Friday's fresh all-time high in the gold price began with a surge in futures and options trading activity on the Shanghai Futures Exchange. That surge in SHFE gold contract trading then saw the precious metal hit $2401 at the London 3pm benchmarking auction, before it peaked $30 above that as London spot dealing closed an hour later, only to sink by $100 as New York Comex trading ran towards the weekend.
Trading volume in New York gold futures that day reached more than half-a-million contracts, over 2/3rds greater than the prior 5-session average. But Comex futures volumes had topped Friday's total twice before since gold's surge began at the start of March.
In contrast, trading in Comex gold options – more leveraged, speculative instruments where no actual metal is involved – doubled from the prior 5-day average, spiking last Friday to the highest since February 2020, when the Chinese Covid pandemic went global.
"We're seeing a lot of demand destruction in the physical markets going on," Steel at HSBC continues. "Bars coins, jewelry...It's getting very expensive for price-sensitive economies to keep buying the underlying physical."
India's gold bullion imports more than halved in value in March from 12 months before, new data said this week, helping cut the nation's trade deficit with the rest of the world to the smallest since last April.
"The gold price surge has dented consumer demand," says Sachin Kothari at Mumbai bullion refiners and supplies Augmont Gold For All.
"Indian investors are not able to digest [this jump, and] wholesale demand by jewellers has also decreased in March and April. Therefore gold imports are expected to come down."
Western gold bullion investing also remains weak, with giant gold-backed ETF the SPDR Gold Trust (NYSEArca: GLD) seeing a small outflow Wednesday after growing for 2 sessions in a row.
Giant silver-backed EFT the iShares Silver Trust (NYSEArca: SLV) also saw net liquidation by shareholders yesterday, shrinking to its smallest size in 3 weeks.
Silver prices today stabilized around $28.50 per Troy ounce, down 4.5% from Friday's 3-year high in US Dollar terms.
"Overall, short-term market prices have been dominated by gaming sentiment," says China's CS.com, "and the probability of a price adjustment is rapidly increasing.
"However, for investors who were unable to get on board during this period of rapid rises, a pullback will bring a rare opportunity to buy into the market."
With Comex gold futures contracts for April 2025 trading at $2498 per Troy ounce Thursday, the 12-month contango compared to current spot prices ran to 4.87%.
That's below the funding cost for a bullish futures position, with 1-year interest rates on US Treasury bonds currently running at 5.16%.
Analysis of London's bullion market published by the Nasdaq derivatives and data service says that March saw trading volume in options contracts on physical gold rise 20.0% compared to last year's daily average. But spot gold volumes rose faster, up by 21.8% according to data from trade association the LBMA.
Source: https://www.bullionvault.com/