Gold Prices Could Continue Rising as Hedge Funds Increase Long-Positions on Gold and U.S. 10-year Treasury Note Contracts

Witawat (Ed) Wijaranakula, Ph.D.
Tue Aug 18, 2015

The rally in gold prices since August 7, after the disappointing July U.S. non-farm payrolls report, could be attributed to a decline in the U.S. 10-year Treasury yields as the correlation between the two of them is high. In July, gold sank to 5-year low on technical selling after a symmetrical triangle breakdown and the China gold rout in late July. 

The CME spot price of gold tumbled 4.62% on July 20 to an intraday low of U.S. $1,080 per ounce, following an overnight two-minute flash crash on the Shanghai Gold Exchange (SGE) and COMEX New York Mercantile Exchange (NYMEX). An estimated 33 tonnes of gold, worth about U.S. $1.3 billion, was traded during the two-minute period, Reuters said. 

The rally in the bond market, starting in the beginning of July, could signal that the Fed rate hike will hurt the U.S. economy, as the June and July U.S. jobs numbers came in below estimates. The April and May numbers also got knocked down by a major revision. The spread between the 2-Year and 10-Year Treasury Note yields fell to 1.44 percentage points on Monday, the lowest level since late April. The gap has shrunk from 1.77 percentage points, when the 10-Year Treasury Note yield hit a high of 2.5% on June 10. 

As of August 11, there are 155,336 short positions for gold futures [COMEX:GC], by non-commercial dealers, compared to about 187,778 long positions, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. The non-commercial dealers have increased their long positions by about 2,986 contracts while they reduced the short positions by about 444 contracts from the previous week, resulting in a gain in the net long positions of 2,542 contracts, worth about U.S. $280 million, where gold contracts are traded in units of 100 troy ounces. 

Looking at the bond side, there are 846,066 short positions of 10-year U.S. Treasury Notes traded on the Chicago Board of Trade (CBOE:TNX), by leveraged funds as of August 11, compared to about 478,375 long positions. As the U.S. equity markets are stalling and the U.S. economy looks wobbly, hedge funds were piling on the long-term notes last week as the COT data showed a net increase of about 53,610 contracts in long positions, worth about $5.4 billion, from the previous week, where TNX contracts are traded in units of $100,000 face value.

From our technical viewpoint, the gold price, which has been moving in a bullish descending wedge chart pattern, broke out last week. As hedge funds are taking on more long positions of both GC and TNX contracts, the gold price could move upward with the near-term resistance at U.S. $1,130 per ounce.

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