Western investors love the prospect of 'panic cuts without the panic', but Shanghai traders are on the offer in precious metals. This morning, the prospect of a direct military confrontation between Israel and Iran is driving safe-haven inflows into Gold, TDS commodity analyst Daniel Ghali notes.

Prospect of monetary inflation has historically benefited Gold

“Selling activity in Gold has been a bit limited, but the top traders still liquidated nearly 5t of notional Gold over the last week This contrasts with Western investor sentiment. Our read of macro fund positioning remains at its highest levels since the Brexit referendum in July 2016; re-levering from risk parity and vol-target funds is supporting a reaccumulation from CTAs and prices continue to rally without challenge.”

“For Western investors, concerns surrounding monetary inflation are mounting as participants read the Fed's reaction function as asymmetric, at a time when the US economy remains decent by many measures. We expected a more measured normalization of monetary policy to challenge bloated positions, given an aggressive global easing akin to current market expectations has typically occurred in response to deteriorating economic or financial conditions.”

“This prospect of monetary inflation has historically benefited Gold prices, but make no mistake, in real terms, prices are already challenging levels not seen since the 1980s, macro fund positioning is already extreme, central bank buying activity has slowed, and rebooting confidence in Asia could sap a major driver of demand for Gold. In the immediate-term, the prospect of a direct confrontation between Iran and Israel is driving even more capital towards Gold.”