Can gold buyers rest easy?

In his latest note JP Morgan notes that investors are likely to favor gold and tech stocks as these market bets are expected to provide a buffer against the possibility of a US recession this year, strategists at JPMorgan Chase & Co. US banking crisis boosted gold demand as proxy for lower real rates as well as hedge against 'catastrophic scenario' – they wrote.

Institutional investors rushed in goldas well as retail investors with renewed concerns about the US banking sector and the possibility of a repeat of what happened 15 years ago. In addition, gold historically seemed to gain when the US economy was in recession, so now it has also become a natural choice for investors. But is it a safe strategy?

Alarm signal in the gold market

Since the beginning of the year, gold has increased by more than 11 percent, in the meantime setting a new price record in US dollars. Although it took place at night with low market liquidity, the record was broken last week. However, can gold buyers rest easy as the situation favors them on all fronts? Well, it seems not quite.

A strong boom in the market should be created by big money following the trend. If the price is higher, more market participants should assume its further increase. Turnover should increase with exposure to long positions, potentially gaining with further bullishness. On the gold market, looking through the prism of futures contracts quoted in the US, this is not the case, which results from COT reportpublished by the CFTC.

According to the report, investors with a speculative attitude towards this market had long positions exceeding short positions at the level of 195 contracts at the beginning of May. In 567, the advantage of long positions over short positions was as much as 2020. contracts. This means that for the last 353 years, despite the fact that the price of gold was climbing up in March 3 and now, institutional investors did not increase their exposure to gold, and even reduced it.

This can be a wake-up call for gold bulls. The current bull market in gold started in 2015 and accelerated in 2019, where we could also observe a divergence in the positioning and price of gold. Investors at the time were very skeptical about increases in the price of the metal, and net long positions fell sharply. The 3-year discrepancy in the positioning and the price of gold helped to create a bull market to some extent, and now we are also dealing with a 3-year discrepancy, where the number of people willing to buy this second gold seems to be rapidly decreasing - at least on the American futures market.

This is worth bearing in mind.