Nomura: Gold May Have Factored In Start Of QE Withdrawal Ahead Of Treasury Market

(Kitco News) – Nomura says gold has been less volatile than many other markets since the yellow metal’s dramatic mid-April sell-off, perhaps because it had already begun to factor in the eventual withdrawal of U.S. quantitative easing more quickly than the Treasury market.

The metal may start to draw support now that speculative net length is low, although an end to exchange-traded-fund liquidation may be necessary for a meaningful move higher, Nomura said.

Gold has been largely range-bound between $1,350 and $1,450 an ounce since the dramatic two-day decline of more than $200 in mid-April, Nomura pointed out.

“What is interesting is that this range is relatively narrow, considering the amount of volatility within markets in recent weeks that was triggered by increased expectations of Fed tapering following Chairman (Ben) Bernanke’s testimony,” Nomura said.

As a result, gold has remained “relatively stable” even in the face of rising U.S. Treasury yields. Gold has bounced since April 16, even though rising Treasury yields normally would to hurt the metal. The 10-year Treasury yield has risen from a low of 1.709% on April 16 to as high as 2.269% earlier this week, its loftiest level in more than a year.

“Our view is the fall in gold prices in April, while driven by immediate worries on Cyprus selling its gold, did help to recalibrate what was priced into gold in terms of the reduction in (Fed) asset purchases,” Nomura said. “The same was not true of other markets, such as U.S. 10Y Treasury yields, which have started to rise more recently….In addition, it is important to note that while reducing asset purchases would be the beginning of policy normalization, it is still very different from the Fed actively hiking rates.”

Further, speculative positioning is also “extremely light” in gold, meaning reduced potential for unwinding of long positions. The Commodity Futures Trading Commission’s weekly report on positioning showed that as of June 4, the net-long position of money managers stood at 57,113 lots for futures and options combined. This is a fraction of the 198,194 net length recorded back on Oct. 9.

Nomura also commented that Asian demand has been relatively strong in recent weeks, based on the price action during Asian trading hours.

“We think that the gold market should be supported from here especially because spec positioning is now so low, and has protected gold in the recent market unwind that started in May,” Nomura said. “However, we maintain our view that for a reasonable move higher, we need to watch for the end of the liquidation in gold ETF holdings.”

By Allen Sykora of Kitco News; asykora@kitco.com

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