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Bart Melek, head of commodity strategy at TD Securities, explains that the money managers increased their net length of gold positioning persuaded by the sump in the DXY index, along with expectations of a dovish Fed and hopes that government stimulus and the US-China trade deal will keep Chinese growth north of six percent and the RMB from eroding.

Key Quotes

“While the yellow metal recovered from its downward move to $1,280/oz, the jump above $1,310/oz proved to be temporary as we expected. This fits well with the fact that the spec positioning did not move in one single direction last week “” money managers grew shorts quite substantially even as long exposure increased aggressively.”

“Given the strong likelihood that the US dollar should remain firm, as the American economy continues to be the best performer relative its peers, gold will face strong headwinds from the broader currency markets. In addition, equity market strength and a robust risk appetite reduced the demand for safe-haven assets such as gold.”

“And, while the US Federal reserve is likely to be dovish relative to previous FOMC meetings, with dots and growth estimates migrating lower, it is unlikely to commit to ending its hiking cycle just yet. Indeed, the US central bank may very well be perceived to be more hawkish relative to current spec positioning, which would suggest some downside from here.”

“As such, the yellow metal still risks a move below $1,300/oz in the near term. In order for prices to move to our $1,364/oz target late in the year, risk appetite will need to moderate, the USD to weaken and Fed policy ambiguity to disappear with the market convincingly calling that the next rate move is a cut. We are not there just yet.”