Gold traders might benefit from knowing about how many global market participants have been shunning the precious metal.
Many investors have been either reducing their exposure to the metal or shorting it at a time when gold has plunged almost 30 percent in 2013 alone, according to Reuters. As a result of this sharp depreciation, the commodity is currently on pace to experience its worst annual performance since the early 1980s.
Gold has had a rough 2013
The precious metal fell into a bear market in April, having lost more than 20 percent of its value since hitting a recent high in 2011. Then, in the following months, it continued to lose ground, dropping below $1,200 per ounce in June. As a result of these losses, gold fell to its lowest price in close to three years. The metal did manage to recover after that month, appreciating until it reached a bull market in August.
“Prices will likely remain under pressure over the short-term as a combination of stronger U.S. macro statistics, higher equity markets and continued outflows of money from gold exchange-traded funds weigh on sentiment going into 2014,” INTL FCStone analyst Edward Meir told the news source.
The change in how many feel about the precious metal has been illustrated recently by industry data indicating that many investors have been pulling out of gold funds, according to Bloomberg. Figures provided by research firm EPFR Global have indicated that so far in 2013, $38.8 billion has been withdrawn from gold funds.
In addition, hedge fund managers have recently indicated their bearish feelings about the precious metal, as data provided by the U.S. Commodity Futures Trading Commission indicated that during the week that ended on Dec. 17, these market participants cut their net-long exposure to the commodity by 2.8 percent to 32,524 futures and options, the media outlet reported. In addition, the total short positions held rose within 6 percent of the record they hit in July of this year.
Gold faces many headwinds
Just in case the aforementioned data is not enough to paint a picture of gold having a difficult time that could get even worse, the precious metal could easily encounter substantial headwinds from a wide range of factors. The commodity is frequently viewed as a safe haven that investors flock to in times of economic uncertainty, as the desire that global market participants have for risk is illustrated by the robust gains that stocks around the world have enjoyed in 2013.
“Gold was probably one of the easiest shorts of all time,” Uri Landesman, who serves as president of New York-based hedge fund Platinum Partners, told Bloomberg. “It has fallen out of favor because people felt its general security wasn’t needed in this market. People wanted to take on risk this year.”
QE tapering could push gold lower
Aside from individuals seeming to have a greater tolerance for risk, the challenges that gold could encounter as a result of the Federal Reserve’s tapering of quantitative easing were illustrated when spot contracts for the precious metal fell to a six-month low during the week ending on Dec. 20, after the central bank specified that starting in January, it will reduce this monthly regimen of bond purchases, according to Reuters.
The Fed revealed at the conclusion of a two-day policy meeting that in January, it will begin purchasing $75 billion worth of financial instruments every month. Since late in 2012, the central bank has been buying $85 billion worth of these securities on a monthly basis. QE is important to those who trade gold since the robust stimulus has been seen as driving up the risk of inflation, which has given global investors less incentive to purchase the metal as a hedge against the risk of rising prices.
In addition to the headwinds that could be created for gold as a result of tapering QE, the U.S. dollar is currently on track to experience its strongest annual performance since 2008, Bloomberg reported. A higher value for the greenback relative to other currencies frequently proves bearish for gold.
Also, HSBC analysts have stated that the precious metal could encounter downward pressure in the near-term as a result of the buying activity that traditionally happens during the holidays, according to Reuters.
“Quiet holiday trading leaves bullion open to volatile movements in either direction as relatively little buying or selling can move the market in thin conditions,” analysts said, the media outlet reported. “The next support level for gold is $1,180. If the market breaks this level we could see a test of $1,150.”
In addition to these short-term predictions, Jeffrey Currie, the head of commodities research at Goldman Sachs Group Inc., has forecast that the precious metal will likely fall in value next year, according to Bloomberg. On Nov. 20, the major investment bank released a report predicting that by the end of 2014, the commodity could fall to $1,050 per ounce.
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