FxWirePro: Yellow metals flirt between $1250-$1300, Glimpse through demand/supply equation and hedging/de-hedging framework

The World Gold Council (WGC) broadcasted data on demand and supply in 2Q and 1H 2017. The WGC reported Q2 gold demand of 953.4t was 10% lower than 2016, while 1H demand slowed 13% to 2,026.1t. Year-on-year comparisons were affected by record ETF inflows in 2016: demand from this sector slowed dramatically after last year’s 1H surge.

Precious metal prices nudged lower today, but lingering close to the $1,300 mark as the bullion market participants awaited remarks on monetary policy from the Jackson Hole symposium which is due to begin later in the day.

Central bank net purchases of 176.7t were also slightly lower in 1H 2017 (-3%).

By contrast, bar and coin investment improved, as did jewelry demand, although the latter remains weak in a long-term context. Total gold supply declined 10% YoY in 1H: mine production was steady while recycling levels continued to drop back after the 2016 surge.

De-hedging: Net de-hedging continued, albeit by a modest 5t, in the subdued 2Q price environment. Dehedging for 1H totaled 22.5t, in stark contrast to the 72.5t of hedging in 1H’2016. The global hedge book now stands at 228t, 22% lower YoY. Project and debt financing were again the primary motivations for gold hedging rather than any change in sentiment.

Hedging framework: Add longs in 3M vs staying short in 6M 180:100 vega-weighted gold straddle calendars (vol pts). We see better value in looking for curve flattening as tighter fundamentals compete with increased producer hedging the coming weeks as spot prices flirt with $1285-1300.

Alternatively, we advocate longs in mid-month tenors on hedging grounds, In bullion market, gold futures (Comex) trimmed $1.05, or around 0.1%, to $1,293.59 a troy ounce. Earlier, the precious metal surged to its highest level upto $1,306.90 in the recent past. Courtesy: JP Morgan