London: Struggling gold prices seem set for further pain, with a flight to the dollar leaving the traditional refuge asset searching for its place as investors build short positions in futures markets and Exchange-Traded Fund (ETF) holdings fall.
Investors betting on a stronger U.S economy and higher interest rates have sought out the dollar, sapping any benefits gold and other so-called "safe havens" might have gained from global trade tensions between the world's largest economies.
For example, the Japanese yen has tumbled against the dollar despite the trade row as Japanese investors bought foreign assets because its central bank had not yet ended monetary stimulus.
"Gold is having an identity crisis," said ING analyst Oliver Nugent. "All of the things you can throw at it ... don't seem to really budge it."
Spot gold, which is down over six per cent this year, is close to a one-year low of $1,211.08 touched on July 19 as the dollar powered to a one-year high on expectations of higher U.S interest rates this year.
The United States and China imposed import tariffs on each other, fraying nerves on global financial markets.
Some analysts and fund managers say the dollar has benefited because the U.S. economy would be more resilient in the face of a trade war.
"The dollar will benefit from trade tensions because the U.S. has a lot less lose than for instance, China, in a trade war," Capital Economics economist Simona Gambarini said.
"If you are an investor, you probably won't want to invest in gold because you are better off with assets that will not be negatively affected by a stronger dollar."
Short positions are building as the market hovers near one-year lows, signalling steeper losses ahead as markets prepare for higher U.S. interest rates.
Tighter monetary policy dents the appeal of non-interest yielding bullion, leaving investors to rely on a rise in the intrinsic value of the asset.
Hedge funds and money managers increased their net short positions in COMEX gold contracts to a record last week, data from U.S. Commodity Futures Trading Commission showed, a week after speculators switched to a net short position for the first time in 2-1/2 years.
In the week to July 24, 5,001 contracts were added to their net short position, bringing it to 27,156 contracts, the biggest on records dating back to 2006, when the data became publicly available.
But some see the record level of short positions as a sign that gold could bounce back.
"If anything, it makes me slightly more optimistic at the margin, as increased shorts in the market suggests there could be upside potential in the price," said Bill McQuaker, multi asset portfolio manager at Fidelity International.
Gold has also failed to capitalise on its role as a hedge against inflation. U.S inflation is at its highest in seven years, and together with unemployment being at its lowest in two decades, the course is set for two more interest rate hikes this year and three in 2019.
Investors are betting that gold could lose more value due to bearish chart signals, with a strong probability of prices dipping as low as $1,200 per ounce, said ActivTrades chief analyst Carlo Alberto De Casa.
Medium-term support for gold is located around $1,210-$1,220 and would need to break above $1,235 per ounce to be considered safely out of its bear scenario, De Casa said.
UBS has lowered its expectations for gold prices in the current quarter, the bank said last week, but kept its average for the year unchanged as it expects a modest recovery in the summer months.