Gold physical demand rebounds

Physical demand for gold has increased substantially over the past few days providing some support as investment demand temporarily retreats. Long liquidation in COMEX gold continued last week, driving the gold price to as low as $1,560. The net speculative length for COMEX gold has declined 51 tonnes to 612 tonnes during the week ending 13 December. At the same time, speculative shorts increased by 11 tonnes to 88 tonnes, leaving the net speculative position long at 525 tonnes. This net position has steadily declined from the highs of 930 tonnes seen in August.

As a percentage of open interest, the net speculative position is now at 24.9%, well below the average of 30% seen over the past three years. In the futures market, deleveraging continues.
Furthermore, while ETF holdings remain close to all-time highs at 75.4m oz, it saw a relatively sizeable decline of 468K oz since Wednesday. While investors are trimming gold long positions, physical demand has picked up substantially since the start of last week. This segment of the market has showed little interest in buying substantial volumes of gold with the price above $1,700 (partly due to the weakness of local currencies, most notably the INR). However, with gold below $1,600, demand has picked up substantially. Indian buying interest has picked up handsomely, but so did buying interest in places like Thailand, Indonesia and China. At the same time, gold scrap sales, though present, remain very sporadic.

This physical demand is evident in the pick-up of our Standard Bank Gold Physical Flow Index (GPFI), which briefly pushed below zero late November, which has now rebounded, indicating that physical demand remains in place, albeit at lower levels than during the period August
to October. We expect this physical demand to support the gold price below $1,600.