Interestingly, the outflow from gold ETFs has slowed markedly since the price recovered this quarter, and according to Standard Bank, recent data suggests that ETF gold holdings actually increased marginally by 66,000 ounces last week.
At the same time, the premium for physical gold has been in a range of $19-22/ounce for the last couple of weeks, suggesting demand for physical delivery remains strong in spite of the higher prices.
Nevertheless, Standard Bank calls the price rally a response to short covering following the steep falls rather than a return to a bull market.
So what are the signals to watch for?
Certainly, speculative shorts in COMEX gold have declined substantially. Since the start of August, the bank advises in a note to investors, speculative shorts in COMEX gold have declined by 115 metric tons (or 33.8%), but the metal failed to attract any new speculative longs, suggesting that expectations of a further rally in prices is low.
China, India Gold Demand
With central-bank buying slow and limited investor appetite for the metal, the main driver remains physical demand in Asia.
China’s second quarter buying was below that of Q1 and much of India’s Q2 surge may have been demand prior to the upcoming festival season. It will be interesting to see if Q3 physical demand continues at the same level as the first half of the year.
Two Signals for the Future
The fall this week in the physical premia to $19/oz may signal a slowing in demand in the face of the price recovery.
Watch those COMEX long positions – if investor appetite returns, ETF gold holdings and COMEX longs will be indicators of whether $1,400/oz could be tested, or if a fall back to $1,300/oz is more likely.
For now, the metal’s price and demand levels seem range-bound.
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