As prices sold off during summer despite perceived economic and political uncertainties, gold’s safe-haven status has been questioned.

While we were surprised by the size and speed of the sell-off, we believe it was not unexplainable. The stronger U.S. dollar and the outlook for rising interest rates in the United States were key headwinds, while U.S. investors started to sell gold as domestic equities climbed from high to high.

However, equities were hit hard last week and gold started to show signs of life. Underpinning its safe-haven status, prices were up around 3 percent from their lows and climbed back above $1,220 per ounce.

We believe this was mainly due to short covering in the futures market rather than genuine safe-haven demand. Sentiment in the futures market is still very bearish as short positions by speculative traders such as hedge funds, i.e. bets on falling prices, remain close to record levels.

Unwinding of these positions against the backdrop of jittery equity markets should provide further short-term support. In the medium to longer term, gold should benefit from a weakening U.S. dollar and returning safe-haven demand, once growth and inflation concerns creep into financial markets.

Any opinions expressed here are the author’s own.

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