Gold ETFs benefited in early 2016 from what James Butterfill, head of research at ETF Securities, said was a belief the world was going to fall into recession. That led investors to take positions which reflected the opinion that the US Federal Reserve would not be raising rates at anything like the pace the markets had been pricing in initially.
He says this saw many opening long gold ETFs. However, as the year developed, and it became obvious recession was not the base case, the direction of flows became ‘puzzling’ because the long positions were not being unwound. James says that at the time there were only a small number of shorts being opened, even when the price of gold started falling as a result of the rise in the dollar. James says he felt this is because there is a lot of uncertainty being created by the election of Donald Trump to the White House.
James also says the uncertainty will continue into 2017 with elections in France, Germany and the Netherlands.
Using some of the fundamentals, James looks back in history and says that there is a similarity today to what happened in December 2015 when the Federal Reserve last raised rates - then sentiment deteriorated and gold fell. James says he would not be surprised if gold continued the recent downtrend, possibly falling, and ‘troughing out’ to the $1,070 level. He refused to be drawn on specifics, but said the trend going into the back end of 2016 looks like it may continue to run.
The big question is what will turn that around? James says he is witnessing short euro positions being opened against the dollar which gives him the confidence the recent rise in the dollar will impact on US earnings.