A volatile week ended in favor of gold investors, with geopolitical tensions reigniting haven demand for the metal.
Hedge funds and other large speculators boosted their bullish bets on bullion to the highest since September last year.
While prices hit the highest in six years earlier in the week, the rally stalled as the risk of war between Iran and the US faded.
On Friday, US President Donald Trump announced sanctions against the Islamic Republic, reminding investors the conflict is far from over.
“An escalation in geopolitical risks, especially over short periods, could send investors into gold and the USD simultaneously,” James Steel, chief precious metals analyst at HSBC Securities (USA) Inc, said in a note on Friday. “This is precisely the climate that benefits gold, even if the US dollar also becomes highly sought.”
FUTURES
Gold futures rose for a third straight week on Friday after the sanctions strengthened the case for owning gold as a hedge.
The announcement came just two days after Trump said Iran is “standing down,” easing market anxiety.
“While we expected price momentum to build at the start of the new year, the rally has been stronger than expected amid escalating uncertainty,” Standard Chartered Bank analysts, including Suki Cooper, said in a note to clients this week.
HSBC on Friday raised its yearly forecast on gold prices to US$1,613 an ounce from US$1,560.
Spot gold on Friday traded at US$1,558.90 an ounce, up 0.6 percent for the week.
In the week that ended one Tuesday, money managers’ bullish bets rose 4.7 percent to 299,814 futures and options, according to data released on Friday by US Commodity Futures Trading Commission.
That is the most since Sept. 24 last year. The increase also took the so-called net-long position to the highest since late September.
BITCOIN
Institutional interest in bitcoin-related contracts appears to be building and market measures indicate high anticipation of the launch of CME Group Inc options tomorrow, according to JPMorgan Chase & Co.
While a consortium known as Bakkt, which includes New York Stock Exchange parent Intercontinental Exchange Inc, began offering options last month, volumes and open interest have been “rather small,” strategists led by Nikolaos Panigirtzoglou wrote in a note on Friday.
Given the dominance of CME in trading bitcoin futures on regulated exchanges, this new offering might change things, they said.
“There has been a step increase in the activity of the underlying CME futures contract” over the past few days, Panigirtzoglou wrote, adding that open interest has increased 69 percent from year-end, and that the number of large open-interest holders has grown.
“This unusually strong activity over the past few days likely reflects the high anticipation among market participants of the option contract,” he wrote.
Introduction of new bitcoin contracts has a mixed track record.
At times it has appeared to be a drag on the price, such as when ICE debuted its new futures contract in September last year. The price peak about US$19,000 in December 2017 occurred just as CME and Cboe Global Markets Inc launched futures on the world’s largest cryptocurrency.
Bitcoin was US$8,027.77 yesterday, up 12 percent for the week and near its highest levels since the middle of November.
Separately, bitcoin’s intrinsic value has been rising, but remains below the market price following a significant divergence in the middle of last year, the report said.
ELECTRICITY
JPMorgan calculates intrinsic value by treating bitcoin as a commodity, and looking at the marginal cost of production including computational power employed and cost of electricity.
“The market price has declined by nearly 40 percent from its peak, while the intrinsic value has risen by around 10 percent,” Panigirtzoglou wrote.
However, “the gap has not yet fully closed, suggesting some downside risk remains.”
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