While gold has started 2014 on a firmer footing than some might have expected, if recent trading patterns are anything to go by, the watchword for 2014 will be volatility.
The first of these patterns is choppy trade on the futures market, which has been noted a number of times in these pages.
In this, yesterday’s US trading session is instructive, after rallying on purchasing managers index data that showed a slow down in growth in the US in December, the gains were erased by what looks to have been a large, sell order on the futures market.
“These kinds of price movements are becoming very common, and it seems some players are putting in very large orders to trigger this kind of slump,” Bill O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, told Bloomberg in a telephone interview. “The exchange needs to look into these kind of spikes.”
The second short term factor facing gold is seasonal index rebalancing.
As UBS points out in its daily note on Tuesday, “Buying related to annual index rebalancing is much anticipated, as the process is well-known in the market. Nevertheless, the move may currently be amplified – squeezing the market higher – as activity is still relatively subdued, with participants only starting to return from the holiday break.”
It adds that this squeeze higher was made more likely by the fact that the overall short position extended to the highest level in five months just before the Christmas break. This is the third factor that could well lend volatility to gold prices in the short term.
“Latest estimates using last Friday’s closing prices and effective weights suggest that DJUBS Commodity Index rebalancing should translate into about 14.9k lots or 1.49moz worth of gold buying this week and 8.86k lots or 44.27moz,” UBS says.
On the topic of short covering, James Steel of HSBC adds, “Commitments of Traders data gathered by the Commodity Futures Trading Commission for the week ended 31 December showed a 0.65moz increase in net long speculative positions in gold to 3.30moz, compared to the previous week… While gold speculative short positions fell slightly from the previous week, it remained at uncomfortably high levels.”
While shorts are high on the minds of traders, in Asia and, particularly China, physicial buying continues ahead of Chinese New Year.
But, the run up to this milestone is also expected to add to volatility.
UBS points out that volumes on the Shanghai Gold Exchange have picked up significantly of late, as too have premiums – mostly staying above $20 for the Au9999 contract over the last few weeks.
“The increased activity in China is consistent with typical seasonal patterns, as we head closer to the Chinese New Year at the end of the month. The dip in prices towards the end of 2013 likely encouraged a pick-up in physical buying and therefore a further draw down on existing stocks.”
And, while inventory levels are generally considered comfortable, if buying were to pick up, premiums could rise as the window for getting imports into the country in time is narrowing.
“Fresh import licenses are needed for 2014,” UBS explains, “and with the New Year festivities scheduled earlier this year, the time between getting the quotas in place and shipping the metal is limited.”
The fifth factor that is likely to keep market participants guessing is the actions of the Reserve Bank of India.
A number of rumours are circulating about whether or not, or rather, if and when the Indian government will reduce import duties and relax gold import restrictions. Such a move would be positive for gold demand in India and, thus for prices. But, as Steel says, “The return of India as a greater importer would be gold-friendly but it is still not clear when, or even if, the authorities will cut the tariffs on gold. It may also take months for greater physical demand to work thoroughly through the market and support prices.”
As in 2013, there remains a great deal of uncertainty in the gold sector and, there are few signs so far that it is likely to abate anytime soon.