UBS: Further room for downside in Gold

Long liquidation in precious metals continued for a third straight week, with the exception of palladium. The latest CFTC data shows that gold net longs were down by 2.99moz as of Feb 17 after longs cut positions further while shorts added the most since November. Gold gross shorts have mostly been covering positions over the last three months, declining by a net 8.80moz after reaching a 16-month high of 16.30moz in early November. As of last Tuesday, gross shorts jumped by 19% or 1.5moz, which in a sense highlights the recognition of growing downside risks for gold as safe haven demand eases and the focus shifts back to looming Fed normalisation. At 15.98moz, gold net longs are at 48% of the all-time high and at the lowest levels in five weeks.
The compromise reached between Greece and its Eurozone partners last Friday, which extends the review of the current programme by another four months, relieves immediate concerns surrounding the previous Feb 28 deadline. In turn, this would mean a reduction in safe haven demand. Gold price action over the past four weeks indicates that market has already been correcting – prices are $110 lower and gross longs are 5.90moz below the 2-year high reached in late January. But while lingering uncertainty as talks continue in the months ahead suggests that investors are probably going to want to hold on to some safe haven positions, there is no incentive to rebuild longs at this point.
The reality is that despite the spec cleanout over the last couple of weeks, gold net positioning is still around 22% above the 12-month average. Given recent encouraging developments in Europe, there could still be some room for further downside for gold. Specifically, the bigger risk for gold right now is the fact that gross shorts remain relatively lean: the reduction of immediate Eurozone risks is likely to encourage shorts – who have been hesitant – to rebuild positions here.

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