Low open interest in gold suggests its undervaluation — TDS

Gold may seem overbought to traders right now, but it’s actually under-owned. This is evident from the extremely low total open interest on the CME, which is hovering near multi-year lows at just 425,000 contracts. Meanwhile, macroeconomic factors clearly support higher prices for the precious metal, especially with the dollar weakening, according to TDS’s Daniel Ghali. 

Ghali argues that gold's current rally isn't driven by strong demand, but rather by renewed confidence in the metal. Open interest is expected to pick up as a function of market plumbing. Algorithmic trading funds will likely ramp up gold purchases as early as next week, with positioning potentially surging ahead of the US nonfarm payrolls report, he adds.

Moreover, big players aren't rushing to sell their gold holdings, while ETF outflows have dramatically slowed in recent weeks. These dynamics are providing strong support for prices, setting the stage for a potential summer rally, the analyst notes.