In early trading on Friday (July 19), gold prices fell sharply. As of press time, spot gold fell below $2,430/ounce, down 0.62% on the day. Spot silver fell 1% on the day to $29.51/ounce.

The most active gold futures contract on COMEX traded 636 lots in one minute from 08:03 to 08:04 Beijing time on July 19, with a total value of US$155 million; 690 lots were traded in one minute from 08:04 to 08:05, with a total value of US$168 million; 599 lots were traded in one minute from 08:12 to 08:13, with a total value of US$146 million.

According to the CME FedWatch tool, the market sees a 98% chance of a U.S. rate cut in September. The appeal of non-yielding gold and silver tends to shine in a low-rate environment. Geopolitical instability and central bank demand also offer a positive medium- to long-term outlook for gold. Holdings of gold exchange-traded funds (ETFs) rose 0.9% in July as of Tuesday, with net inflows of 749,141 ounces, according to data compiled by Bloomberg. This is an early sign that ETF investors, who have been largely net sellers of gold over the past three years, may have begun to warm up to gold and silver as the likelihood of an impending rate cut is increasing significantly.

“Analysts expect a long-term rally in precious metals, driven by the Federal Reserve’s readiness to cut interest rates and their belief that inflation is under control,” said Russell Shor, senior market specialist at Tradu.

However, a rate cut in the near future is still not a done deal. The International Monetary Fund (IMF) said on Thursday that the Federal Reserve should not cut interest rates before the end of 2024. Meanwhile, the European Central Bank kept interest rates unchanged on Thursday as expected, and President Lagarde said it was "completely open" to what action to take in September.

There are still signs that gold's rally has been overdone, with the metal's 14-day relative strength index hovering around 70, a point some investors consider overbought.

Daniel Ghali, senior commodity strategist at TD Securities, noted that the top ten participants in Shanghai Futures Exchange (SHFE) gold trading continued to increase their gold positions, with their net longs increasing to an all-time high.

“Discretionary traders have also been bidding up Comex gold in recent weeks, with signs that the Trump trade has driven the recent gains,” he said. “Certainly, commodity trading advisors (CTAs) also contributed to last week’s price gains. Looking ahead, however, we see signs that the upside momentum may be running out in the short term.”

Ghali said there are early signs of a buyer strike in Asia, with Shanghai gold now trading at a slight discount. China's gold ETFs have also seen recent signs of withdrawals, suggesting that Chinese retail appetite is drying up in the face of these higher prices. Discretionary traders are also slightly more heavily positioned in gold than the market expects the Federal Reserve to cut interest rates over the next 12 months, suggesting some signs of froth.

“For the first time in months, we are seeing a downside asymmetry in CTA positioning risk as algorithmic trend followers liquidate positions in almost all cases over the coming week,” Ghali said. “In fact, the continued rise in prices is now unfavorable for CTA long positions given the funds’ typical volatility-targeting risk management framework.”

Article forwarded from: Jinshi Data