Gold prices could face near-term pressure next week as index-driven flows are set to weigh on the market during the Bloomberg Commodity Index’s (BCOM) annual January rebalancing, Deutsche Bank analyst Michael Hsueh said.
“Gold and silver are amongst the commodities which will likely be negatively affected by BCOM index rebalancing during the month of January, in addition to aluminium. On the other hand, cocoa, crude oil, natural gas and gas oil will likely be positively affected,” Hsueh wrote in a note.
The rebalancing process will run from January 9 to January 15.
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The adjustment reflects a sharp cut in gold’s weighting within the index, driven by index rules that cap the exposure to any single commodity in order to preserve diversification.
Gold’s target weighting in the BCOM is set to fall to 14.9% from 20.4% due to the BCOM "index rule that no single commodity can exceed a 15% weighting, seeking to maintain diversification."
Hsueh estimates that the rebalancing implies roughly 2.4 million troy ounces of gold selling over the five-day window.
Based on historical sensitivities observed in exchange-traded products, the analyst said this flow “may be worth 2.5-3.0% on the gold price,” depending on the lookback period and whether weekly or monthly changes are used.
Silver is also expected to face a negative impact. When scaling expected flows by open interest and average daily trading volume, gold and silver rank among the commodities with the largest projected rebalancing supply, Hsueh noted.
