Gold's three-year bull run has come to an end, yet there is no sign of a major surge in short selling. The nature of this correction appears to be a collective retreat by long holders rather than an aggressive offensive by short sellers.
After hitting a record high near $5,600 per ounce in January, the gold price reversed sharply. Gold ETFs tracked by Bloomberg data have seen cumulative outflows approaching $18 billion. Last month, the price repeatedly fell below the $4,000 per ounce level, officially entering a bear market and recording its worst monthly decline in nearly two decades.
However, positioning data from the New York futures market shows that asset managers' short positions remain near historical lows. Bart Melek, Head of Commodity Strategy at TD Securities, stated that the current selling pressure primarily stems from long liquidation, not from new short positions being established. This suggests there is still considerable room for the market to move lower.
Long Liquidation Drives Decline, Shorts Hold Back
In the New York futures market, fund positions must be reported to regulators, providing a relatively transparent window into market sentiment. Data indicates that asset managers' short positions remain near historic lows, with only a slight shift towards a net short position over the past few weeks.
"The vast majority of gold's adjustment this time has come from long liquidation, not from investors actively building short exposure," said Melek. "Current short positioning is minimal, meaning there is significant room for it to expand in the future, while there are also still many long positions that could be further reduced."
Short-term traders, or Commodity Trading Advisors (CTAs), who dominate the New York market, typically operate based on technicals rather than fundamentals. Analysis from TD Securities shows that these investors have been taking profits on long positions for about a year, but overall, their shift to a net short stance has been limited.
Should the macro environment deteriorate further—particularly if the U.S. dollar and yields remain high, or if inflation keeps the Federal Reserve hawkish—these fast-moving quant funds and speculative investors still have ample room to increase their short bets.
Sustained ETF Outflows Act as Marginal Pricing Force
For retail and institutional investors, physically-backed gold ETFs are one of the most popular vehicles for accessing the gold market, making their fund flows a key gauge of gold's relative appeal.
Since the outbreak of conflict in the Middle East, a wave of selling by ETF investors has exerted persistent downward pressure on gold prices, contributing to the metal's worst monthly drop in nearly two decades in June. Although gold typically performs well during geopolitical turmoil, the oil price spike triggered by this conflict has raised greater concerns. As investors anticipated that interest rate hikes would diminish gold's appeal relative to yield-bearing assets like government bonds, ETF outflows accelerated notably.
Analysts at JPMorgan noted in a report that ETF investors are particularly sensitive to changes in borrowing costs. As other sources of demand have quieted, they have become the "marginal pricing force" in the gold market. The bank now forecasts global gold ETFs to see a net outflow of around 50 tonnes this year, a sharp reversal from its previous forecast of a net inflow of roughly 400 tonnes. Analysts led by Greg Shearer stated that "macro and rate conditions are likely to keep gold in a lower range over the coming quarters," though the bank maintains a long-term bullish stance.
Central Bank Buying Continues, China Extends Streak to 20 Months
Central bank demand was a crucial pillar supporting gold's multi-year bull market. Early in the Middle East conflict, news of gold sales by central banks in countries like Turkey, Russia, and Azerbaijan dampened sentiment and sparked fears of large-scale official sector selling.
However, the latest industry data shows that, in aggregate, central banks actually accelerated their gold purchases in the first quarter. Survey data also indicates their intention to continue adding to reserves.
The People's Bank of China has been particularly notable, continuing its purchases during this price decline. As one of the world's largest sovereign buyers, the Chinese central bank has increased its gold reserves for 20 consecutive months, with the pace of buying disclosed in June being the fastest since 2023.
"I generally see consistency from central banks on the gold reserve question," said Chris Louney, Commodity Strategist at RBC Capital Markets. "If your goal is de-dollarization and diversification, gold, as a long-term reserve asset deeply embedded in the global monetary system, naturally stands out."
Longs Wounded, But Long-Term Bullish Thesis Intact
Buying gold had been a consensus trade on Wall Street for years, but several banks, including UBS Group, Goldman Sachs Group, and Deutsche Bank, have recently lowered their gold price forecasts.
Despite this, analysts broadly maintain that gold's long-term bullish narrative remains intact, though few are rushing to call a bottom. Nicky Shiels, Head of Metals Strategy at MKS Pamp SA, said the market has moved from "euphoria to reckoning," and the next leg higher may require the recent U.S. dollar rally to fade and for structural themes like currency debasement to regain dominance.
After its worst monthly drop in nearly two decades, gold prices have stabilized above $4,000 per ounce over the past week as investors pared bets on further rate hikes and dollar strength.
Some investors are already positioning for the next move. Alexandre Carrier of the DNCA Invest Strategic Resource Fund said his fund's allocation to precious metals was relatively low compared to other asset classes, but he plans to buy on the dip. "Once the interest rate outlook becomes clearer and the dollar's ascent halts, we may increase our position," he said.
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