Gold prices have sold off on lower speculative positioning …
After rallying to a record high in June, gold prices have declined on a selloff in speculative futures positions and gold-ETF holdings. Although the sell-off in speculative positions might not be surprising given the rise to a record-high price and decreased concerns over European sovereign debt, it stands in sharp contrast to the movements in US real interest rates, which have fallen to near-decade lows.
… however significantly lower US real rates point to higher prices
Under our gold framework, COMEX gold market positioning tends to reflect US real interest rates, with low US rates driving a high level of net speculative length in gold futures. Consequently, the recent decline in gold net speculative length, even as 10-year US TIPS yields fall below 1.00%, suggests that the gold market is now oversold, and we expect increasing speculative long positions to carry gold prices back toward our 6-month COMEX gold price forecast of $1,300/toz.
Renewed quantitative easing measures by the US Fed would be an effective catalyst to drive gold prices higher
We expect the current low real interest rate environment to continue as our US economics team recently lowered their US growth outlook for 2011, with the implication that the US Federal Reserve will likely keep short-term US interest rates low through 2011. This should provide further upside support to gold prices and raise the upside risk to our current gold price forecasts. In addition, our US economics team also expects that the US Federal Reserve will return to quantitative easing measures in late 2010 or early 2011. We believe that a return to quantitative easing could act as a strong catalyst to carry gold prices to higher levels.