Mohamed Nureldin Abdallah /Reuters
Fund managers are pulling billions out of gold.
- Gold is the worst-performing major asset class of 2018.
- Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch, said the key catalysts that could reverse its decline is a dollar that falls alongside US Treasury yields.
- Investors are making record bets that yields will continue rising.
- Watch gold trade in real time here.
Gold investors are having a tough year.
The precious metal is down 8% so far in 2018, and nearly 14% on an annualized basis - making it the worst-performing major asset class this year according to Bank of America Merrill Lynch.
This week, fund managers headed for the exits at a pace not seen since December 2016 as they pulled $1.2 billion out of the precious metal, according to Michael Hartnett, BAML's chief investment strategist. There has been $7 billion in outflows over the past three months, he added.
Gold has weakened this year alongside many emerging-market currencies because the dollar strengthened and US interest rates became more attractive. On August 13, gold fell below the key technical level of $1,200 an ounce for the first time since early 2017. It traded up 0.7% to $1,202.90 an ounce on Friday.
Gold is usually favored as a safe haven during market turmoil, but even all the back and forth on trade between the US and China has not stirred up a bid for the metal.
But gold "will be bid if US dollar follows US Treasury yields lower," Hartnett said. "Watch for DXY [US dollar index] break below 95." It was down 0.4% to 95.28 on Friday.
Lower US Treasury yields would imply that bond prices are rising, and that's a bet many investors are not making right now. In fact, hedge funds have placed record bets against 10- and 30-year Treasurys, according to the latest data from the Commodity Futures Trading Commission.
This wager has worked out so far this year for speculators, but not for gold traders. The 10-year yield topped 3% in April for the first time since 2014 and has risen by 44 basis points since the start of the year.
CFTC data further show that investors have not been this doubtful of a gold rally since 2006. Managed money net-long positions on the CME are at the lowest since that year, while net-long positioning turned negative in mid-August for the first time since 2001.
But with record short positioning comes the risk of a short squeeze, which could propel gold prices higher even faster. According to Hartnett, the fund flows out of gold may be a contrarian signal.
World Gold Council
See also:
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- MOODY'S WARNS: Mutual funds are bleeding cash at an unprecedented rate, and they're increasingly vulnerable to the next market meltdown
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