The gold price rally had become increasingly euphoric in January and February. In a sense, therefore, it was behaving like a number of other asset prices that had been swept up in strong risk appetite/exuberance at the start of the year (e.g. European equities).
The gold price rally, though, was also driven by a SHORT squeeze, on concerns about tariffs on US gold imports. Those concerns triggered panic buying of physical gold in London (to be shipped to New York). There was therefore a sharp move higher in London gold lease rates earlier this year (i.e. the cost of borrowing gold – see fig 1).
Of interest, though, gold lease rates have been falling since mid-February, and, since then, upside momentum in the gold price has started to fade (i.e. from late February and into early March – see fig 2).
Consistent with the fall in lease rates, and that loss of upside momentum in the price, net long positioning in gold has peaked and has started to fall (from high/crowded long levels). Usually, as fig 4 shows, a downtrend in net long positioning is associated with (and is a driver of) gold price weakness. All of that therefore, coupled with SELL signals from various technical models (e.g. see fig 3), supports the expectation that the gold price rally (short squeeze) is probably complete and, therefore, likely to reverse in the near term.
Fig 1: Gold lease rates (i.e. the interest rate paid to borrow gold, %)
Fig 2: Gold futures with 50 & 200 day moving averages (USD/lb)
Fig 3: Gold medium term ‘technical’ scoring system vs. gold price (US$/oz)
Fig 4: Gold net speculative positioning vs. gold price (USD/oz)
