Gold outflows accelerate in 2018 with key remedy still not in sight

Fund
managers are pulling billions out of gold.
Mohamed Nureldin Abdallah /Reuters

• Gold
  is the worst-performing major asset class of
  2018. 
• Michael Hartnett, the chief investment strategist at
  Bank of America Merrill Lynch, said the key catalysts that
  could reverse its decline is a dollar that falls alongside US
  Treasury yields. 
• Investors are making record bets that yields will
  continue rising. 
• Watch
  gold trade in real time here.

Gold
investors are having a tough year. 

The precious metal is down 8% so far in 2018, and nearly 14% on
an annualized basis — making it the worst-performing major asset
class this year according to Bank of America Merrill Lynch. 

This week, fund managers headed for the exits at a pace not seen
since December 2016 as they pulled $1.2 billion out of the
precious metal, according to Michael Hartnett, BAML’s chief
investment strategist. There has been $7 billion in outflows over
the past three months, he added. 

Gold has weakened this year alongside many emerging-market
currencies because the dollar strengthened and US interest rates
became more attractive. On August 13, gold fell below the
key technical level of $1,200 an ounce for the first time since
early 2017. It traded up 0.7% to $1,202.90 an ounce on Friday.

Gold is usually favored as a safe haven during market turmoil,
but even all the back and forth on trade between the US and China
has not stirred up a bid for the metal.

But gold “will be bid if US dollar follows US Treasury yields
lower,” Hartnett said. “Watch for DXY [US dollar index] break
below 95.” It was down 0.4% to 95.28 on Friday.

Lower US Treasury yields would imply that bond prices are rising,
and that’s a bet many investors are not making right now. In
fact, hedge funds have placed
record bets against 10- and 30-year Treasurys, according to
the latest data from the Commodity Futures Trading
Commission.

This wager has worked out so far this year for speculators,
but not for gold traders. The 10-year yield topped 3% in April
for the first time since 2014 and has risen by 44 basis points
since the start of the year. 

CFTC data further show that investors have not been this
doubtful of a gold rally since 2006. Managed money net-long
positions on the CME are at the lowest since that year, while
net-long positioning turned negative in mid-August for the first
time since 2001. 

But with record short positioning comes the risk of a short
squeeze, which could propel gold prices higher even faster.
According to Hartnett, the fund flows out of gold may be a
contrarian signal. 

World Gold Council

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