Could Gold and Gold Miners Shine as the Dust Settles?



Money managers increased net longs

The CFTC (Commodity Futures Trading Commission) releases its Commitment of Traders (or COT) report every Friday. It gives a breakdown of the open interest positions of all major contracts in the futures market through the previous Tuesday.

For the week ended May 29, money managers increased their long positions to 54,001 contracts from 16,531 the week before. Fresh buying and short covering led to higher bullish bets on gold during the week. According to TD Securities, the main reasons for adding to long positions in gold were the Italian crisis and deteriorating trade relations.

Assessing the gold price outlook

The factors mentioned previously in this series and geopolitical concerns could drive some investors to gold. In view of the Fed’s tightening path, gold (GLD) might not be able to attract a sustained higher bid. Geopolitical tensions usually bid up gold for a very short time, and then it reverses. In the short term, gold might still be looking at lower levels and could go on to reach $1,280 per ounce before its support kicks in, which could be in the form of ETF inflows or physical gold buying from price-conscious Asian consumers.

Gold and gold miners

As the dust settles, gold prices could continue to go higher, as we highlighted in our series Bulls versus Bears: What’s Driving Gold? Among other factors, geopolitical concerns in the Middle East, trade tensions, and policy uncertainty in the United States could continue to support gold prices in the medium to long term. You can also read Can Gold Stocks Catch Up to Broader Equities and Gold Prices? that shows how gold equities are looking quite cheap compared to the broader equities.

The current average ratio of the NYSE Arca Gold Miners Index (GDX) and the S&P 500 Index (SPY) is 0.23 compared to the ten-year average of 0.70, as you can see in the graph above. Once gold prices stage a consistent and sustained bull run, gold miners could catch up to gold and the broader markets.

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