Gold price on knife edge after post-Fed fall

Spooked by Federal Reserve's hawkish stance, hedge funds start liquidating 345 tonnes worth of bullish gold futures positions
Yesterday on the Comex market in New York, gold futures with December delivery dates fell more than $30 an ounce from where it trading just before the Federal Reserve's interest rate announcement. By the end of the day gold had clawed back some of those losses, but on Thursday the metal was being sold off again.

Late afternoon Thursday gold was exchanging hands for $1,145.10 – down more than 3% from $1,183.50 ahead of the Fed statement and a three week low. Higher interest rates boost the value of the dollar and makes gold less attractive as an investment because the metal is not yield-producing.

While the Fed decided to keep interest rates unchanged it changed the language in the statement to suggest a hike in December is more likely. The market had begun to price in an increase only in March 2016 and gold bulls were forced into a retreat.

Failure to hold this level would attract some additional long liquidation as a break below $1,140 could signal a reversal of sentiment

The Fed voted 9 to 1 to leave rates in a range of zero and 0.25% where they have been since December 2008. Interest rates in the world's largest economy has not been raised in more than nine years which played a huge factor in gold's rise to a record $1,909 in September 2011.

Gold hit its highest level since June 22 a fortnight ago, amid fresh indications that a limp US economy may push a rate hike further into the future, but that narrative now seems to no longer apply.

On the technical front gold is also looking vulnerable.

Hedge funds reduced bullish bets to more than five year lows ahead of the September Fed decision, but the hold on rates then forced a change of thinking with large futures speculators or "managed money" playing catch-up as the sentiment towards gold turned.

Hedge funds built up net long positions – bets that gold will be more expensive in future – for five weeks in a row, tripling holdings over the past month.

Last week the  CFTC's weekly Commitment of Traders data showed net longs now stand at 12.2 million ounces (345 tonnes), the highest since February.

That constituted a huge reversal from July and early August when hedge funds entered net short positions for the first time since at least 2006, when the Commodity Futures Trading Commission first began tracking the data.

Ole Hansen, head of commodity strategy at Danish bank Saxo says after yesterday's abrupt reversal the price of gold has so far managed to stay above the next level of support at $1,148 an ounce (only just), but "failure to hold this level would attract some additional long liquidation as a break below $1,140 an ounce could signal a reversal of sentiment":

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LME Zinc may recover and average $2,275 a ton in 2016: Deutsche Bank

Deutsche Bank's bull case on zinc had been severely dented over the past three months. 

A strong USD combined with Chinese demand fears has seen a build of shorts on the LME, and prices collapse by $800 a ton since the beginning of May.

Glencore’s bold step of closing a similar amount of capacity is likely to squeeze out short positions, and lead to a deficit market of c.500kt in 2016E. 

This would be the fifth year in a row of zinc deficits, and Deutsche Bank forecasts the zinc price to recover and average $2,275 a ton in 2016E.

However, zinc prices at London Metal Exchange settled down by 0.64% to $1805.50 a ton on Thursday, while inventories down by 1050 tons to 587200 tons.

Zinc price rally has further to go

The mood at the metals world's number one annual gathering – LME Week – appears to be one of cautious optimism.

A survey of 400 metals and mining investors polled by Macquarie at the London summit returned a moderately bullish view of the next 12 months for base metals.

Platts quotes Macquarie's head of commodity research Colin Hamilton as saying "despite the ongoing and conspicuous issues for fundamentals across base metals markets, the overall mood was not as bearish as we might have expected":

"While concern over Chinese economic growth and metals demand was clear, the consensus for growth, albeit slower, persisted," he added.

Zinc was the top pick among the delegates with the consensus view that the metal would be trading at $2,000 a tonne in a year's time, up by double digits from today's ruling price.

Glencore may also ride to the rescue of nickel with speculation rife that the Swiss mining and trading giant is on the brink of announcing supply cuts

Glencore said last week it would slash its zinc output by over a third or 500,000 tonnes, most of it in Australia, after the price of the industrial metal fell to a five-year low leading to a 10% jump in the price on Friday.

Copper was also expected to strengthen adding $500 to todays's price around $5,300 over the next year, while tin should continue its good run holding onto its gains around $15,000 a tonne.

Aluminum was considered the worst bet with predictions of a fall to $1,450 a tonne by this time next year.

Last year's favourite, nickel also found no love with forecasts of further losses to $9,650 a tonne compared to today's LME ask of $10,460 a tonne.

But here Glencore may also ride to the rescue with speculation rife that the Swiss mining and trading giant is on the brink of announcing cuts at its operations in Canada, Australia, New Caledonia and elsewhere. Glencore is the world's fifth largest producers of the steelmaking raw material.

During the boom years copper was the top pick among summit attendees for five years in a row before switching to lead and tin in 2013.

Gold price just $15 away from major rally

On Friday, gold bulls were off to the races, spurred by a turnaround in sentiment towards commodity markets and fresh indications that a rise in US interest rates may be further off than previously thought.

On the Comex market in New York, gold futures with December delivery dates traded up as much 1.3% at $1,159.30, the highest since August 21. Gold is up 5% from where it was trading before the US Federal Reserve at its September meeting decided to hold rates steady. The last time rates were hiked was June 2006.

The week before hedge funds more than doubled net longs which now stand at just under 5 million ounces, the highest since April

Gold's leg up on Friday came after Fed minutes released yesterday suggested that the US economy will grow well below historical averages for the rest of the decade. The central bank estimates growth of around 1.7% through 2020 versus average growth of 3.1% over the past 50 years.

The dollar and gold, and bond yields and gold, have strong negative correlations and on Friday the greenback fell against the currencies of its major trading partners while treasury yields fell across the board.

Hedge funds were wrong-footed by the decision to keep interest rates near zero reducing bullish bets to more than five year lows ahead of the Fed decision.

But sentiment has now turned and according to the CFTC's weekly Commitment of Traders datafor the week to October 6 large speculators on Comex – referred to as "managed money" – added nearly a fifth to their bullish positions from the week before.

The week before hedge funds more than doubled net longs which now stand at just under 5 million ounces, the highest since April. Speculators also cut back on short positions – bets that gold could be bought cheaper in the future – reducing overall positions to 7 million ounces, down from record highs above 11 million ounces set in July.

We have argued that the first US rate hike could become a buying opportunity as it would remove the uncertainty that has prevailed for many months

In late July and early August, hedge funds entered bearish positions not seen since at least 2006, when the Commodity Futures Trading Commission first began tracking the data.

Saxo Bank in its quarterly outlook released last week, said the "the eventual recovery in gold hinges on a change in sentiment among paper investors".

The Danish bank pointed out that most of the third-quarter rallies were driven by hedge funds covering short positions, first after the Chinese devaluation and second after the dovish Federal Open Market Committee statement on September 17. Friday's rally, in solid volumes, followed a similar pattern:

"The combination of a dovish Fed, uncertainty about China’s currency policy and the health of the global economy, as well as low investor involvement, may eventually be what triggers or forces a sentiment change. We have argued that the first US rate hike could become a buying opportunity as it would remove the uncertainty that has prevailed for many months. As we still wait for what potentially could be an elusive rate hike, some uncertainty will linger.

"But having seen three robust recoveries within a short period, we sense a change of sentiment is unfolding. Key to this would be a move above gold’s August high at $1,170/oz, which would confirm a floor has been established. We maintain our year-end target of $1,250/oz and only a break below $1,080/oz would bring a change to this outlook."

Click here for Saxo Bank's commodity insights and essential trades for the final quarter of the year.

Gold price poised to break bear trend

How Glencore production cut will affect Zinc?

LME zinc surged by about 2% to climb above $1,700 per ton, and the most actively-trade zinc contract on the SHFE also rose to around 14,000 yuan per ton after Glencore’s cut news.

Glencore said on Friday it will cut 500,000 tons, around one third of its annual zinc output, of global zinc production due to low prices.

How Glencore’s cut news will affect zinc market?

“Zinc prices, in the short term, will get a boost from the cut news, but its weak fundamentals will not allow a sustainable price rise,” an analyst from Guosen Futures told SMM in the latest interview.

Poor zinc consumption in China, due to a slowing economic growth, is the leading reason behind sluggish zinc prices, the analyst pointed out.

“Weak demand is now in marked contrast to high utilization rates at domestic zinc smelters facing high TCs, especially when a traditionally peak demand season in October also fails to materialize so far this year,” the analyst explained.

The global zinc market is also not in good shape, despite no big rise or even a slight drop in LME zinc inventories, as unreported zinc inventories are estimated to be huge.