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A week in gold: Bulls stil find reasons to be optimsitic

Published: 07:33 27 Jun 2015 BST

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Gold continued to drift lower despite the problems in Greece and seeming reluctance by the US Fed to raise interest rates.

A steady decline in the amount for gold held either in exchange traded funds and long or buy futures position has been one reason.

Aggregate gold ounces under management in gold ETFs hit a new recent low of 51mln oz Canadian broker RBC noted this week.

That compares with an all-time high of 84.6mln oz in December 2012.

The current level has not been seen since early 2009 said the broker and has been accompanied by a decline in net long futures to 7.7 Mln oz against an average of 11.6 Mln over the year so far.

“We believe that the recent decline in ETF holdings and net long position is due to a de-risking of positions with uncertainty around a potential Fed rate hike in September,” RBC said.

It added it expects ETF holdings will remain around the 52 mln oz level, though activity may increase should a Greek bailout deal fail to materialise or if the Fed raises rates at a slower pace than expected.

RBC strategist George Gero told CNBC he expects gold will end the year higher than it started with a median price of $1,230 to $1,250.

Another bull of the metal is Austrian bank Erste, even if expects the price to stay relatively steady between the US$1,200 and US$1,250 mark over the next twelve months.

It, too, attributes recent weakness to the large decline in ETF holdings, though now it appears as though practically all market participants have lost faith in gold and the exodus appears to have ended.

“What is quite remarkable is the current divergence between actual gold price performance and the largely negative perception of many market participants,” it said.

“Gold may have moved sideways in dollar terms last year, the bull market resumed in nearly every other currency.”

Erste is also cautious on the widely held view that rising interest rates equates to a  -declining gold price.

While statistically there is a negative correlation between the Federal Funds rate and the gold price, Erste said three of the largest upwards gold moves of the post 1971 era occurred when in rising nominal rate environments.

US stocks are trading at generous valuations in comparison to historical levels and when  a mean reversion occurs, gold's characteristics as a portfolio hedge will come to the fore.

Erste also sees the prospect of a doubling of Asia's gold demand over the coming decade as realistic, even likely.

Add in high debt levels globally and gold represents an important instrument for preserving the purchasing power of savings, while it is at the same time a hedge against unforeseeable events, the bank concluded.

Soon after trading got underway on Wall Street, gold was trading at US$1,171, around US$30 lower on the week.

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