The surprise currency move from China last week which helped trigger the first weekly gain for gold in eight weeks has so far failed to ignite any interest from investors using exchange-traded products backed by the metal, according to an expert. 

 

This is in sharp contrast to tactical traders such as hedge funds who cut bearish bets by 73 per cent but still maintained an overall bearish exposure to gold, said Ole Sloth Hansen, head of commodity strategy, Saxo Bank.

 

While tactical short-term traders such as hedge funds have reacted to the recovery last week, both long-term institutional and private investors are not yet convinced that gold has turned the corner, he said.

 

A continued devaluation of the yuan combined with the upcoming festival season in India may help trigger a revival in physical demand from both of these major consuming countries. 

 

The paper investors meanwhile would need to see either signs of a reduced risk of a US interest rate hike or a major adverse move among other asset classes to rekindle interest at this stage.  

 

Platinum is a different story with the recent price drop triggering a strong response from investors. 

 

Gold is currently trading some $121 per ounce above platinum which represents a premium of more than 10 per cent.

 

In response to this weakness, investors have now since June been continuous buyers with total holdings in exchange-traded products rising by close to nine per cent.

 

Appetite for gold Call options

 

So far, with the upside potential still uncertain, we have seen increased demand for call options as a more cautious way to express a bullish expectation, said Hansen.

 

"We are seeing increased interest to buy XAU calls in the interbank market. Vols jumped higher in July, but have since moved back down again, and now trading at interesting level if you are looking to buy volatility. The spot price has been rejected at $1,120-25 per ounce a few times, but also looks well supported around $1,110-1,105/oz at the moment. The level to watch on the upside is $1,132 per ounce," said an FX options dealer. 

 

That is the old low from last November which the flash crash on July 20 took out with a vengeance.

 

Outlook for Mena investors

 

The falling commodity prices especially oil and industrial metals continue to put emerging market currencies under pressure. This currency weakness combined with the recovery in gold during the past week has seen gold priced against local emerging market currencies move sharply higher, said Hansen.

 

Gold priced in Indian rupees and Chinese yuan, the world’s two biggest consumers of physical gold, are both up by more than six per cent compared with the recent lows. 

 

While this on paper looks negative for trading activity in Dubai, the Mena hub for commodity trading, the risk of further devaluations may spur demand from investors seeking a hedge against falling currency values, he added. - TradeArabia News Service