Short sellers in the futures market extended their position for the sixth consecutive week last week pushing the overall short position to a record 14.6m oz.
But, while the move is indicative of a continued bearish attitude by traders toward the yellow metal, analysts say it could be a good thing for gold.
According to UBS, while there remain no anticipated shifts at a macro level that would improve sentiment, ” The fact that gold shorts are sitting at all-time highs would make aggressive attempts to the downside relatively more difficult. At the same time, this means that an upside catalyst would likely obtain a more significant reaction as recent shorts get squeezed.”
But it says, ” The difficulty gold has faced thus far to break above the psychological $1400 mark suggests that many are still looking to sell rallies and it would have to take a much more convincing move to get the shorts significantly worried.”
That said, there are some encouraging signs for the metal, primarily the support offered by physical buyers.
As UBS says, “Headlines this week reveal continued appetite from central banks in April… Buying from these central banks highlights the trend for increasing gold reserves, especially among EM central banks, which we expect to remain in place this year. While news of central bank buying does not have an impact on price, it does help overall sentiment on the margins.”
Meanwhile, the bank says, physical demand lingers, “albeit at a less frantic degree than what was observed in the few weeks that immediately followed the sharp correction in April.”
Standard Bank also remains positive over the long term saying “Even taking a slowing of Fed quantitative easing into account, we still feel that fundamentals remain supportive—global liquidity should continue to grow, although maybe at a slower pace, and real long-term interest rates look set to remain low. Nevertheless, we cannot ignore investor apathy towards the metal and acknowledge that it will take some doing to restore confidence. Consequently, while we do still foresee upside, such gains will most likely be hard won. The first challenge will be to push past the $1,400/oz hurdle.”