Gold Brief Update: Thank You, Janet!

Introduction

In this report, I discuss my short-term views about the gold market. To do so, I will analyse closely the recent changes in net speculative positions on the Comex (based on the CFTC statistics) and ETF holdings (based on FastMarkets’ estimates) and draw some interpretations about investor and speculator behavior. Then, I will share my outlook for gold from a technical and a global macro view. Finally, I will disclose my trading strategy on SPDR Gold Trust ETF (NYSEARCA:GLD) and other market instruments and discuss possible trade ideas.

Speculative positioning

(Source: CFTC)

According to the latest Commitment of Traders report (COTR) provided by the CFTC, money managers lifted massively their net long positioning for a third straight week over the reporting period (May 30-June 6), while spot gold prices rallied by 2.6%.

The net long fund position – at 470.74 tonnes as of June 6 – climbed by 118.33 tonnes, or 34%, from the previous week (w/w). This was driven essentially by long accumulation (+153.58 tonnes w/w) but partially counterbalanced by a build-up of shorts (+34.75 tonne w/w).

The net long fund position in gold is now up 347.80 tonnes, or 283%, in the year to date, while gold prices have strengthened by roughly 10% over the same period.

My view

The notable improvement in gold’s spec positioning over the reporting period was exaggerated, compared with the slightly positive changes in the macro conditions – the dollar and US real rates dropped just slightly.

The re-engagement of longs may be the result of momentum-based buying after the break of key technical levels (such as the downtrend line from the all-time high at the end of May).

But gold prices have weakened since June 6, suggesting that specs have eventually tempered their bullishness. This makes sense in a context where the macro backdrop has become less friendly toward gold and the rest of the complex.

Importantly, it is fair to argue that the spec positioning in gold starts becoming too heavy, with the net spec length corresponding at 61% of its record.

But spec behaviour toward gold can be excessive for a long period of time, so I’m not worried. What will be key is the trajectory of the dollar and US real rates in the coming weeks and months, in my view.

Investment positioning

(Source: FastMarkets)

ETF investors have expressed a stronger buying interest since the start of the month. They bought about 18 tonnes of gold last week after accumulating 9 tonnes in the preceding week, according to FastMarkets’ estimates.

ETF holdings totalled 2,102 tonnes as of June 9; they are up 25 tonnes so far in June after falling by 5.25 tonnes in May. In the year to date, gold ETF holdings have increased by 152 tonnes, or 8%, principally thanks to marked inflows of 94 tonnes in February.

Although the pace of gold ETF buying is solid so far this year, it is more modest than last year.

My view

The renewed inflows into ETF gold holdings are encouraging because it suggests that macro investors continue to see the “barbarous relic” as an interesting diversifier in a context where risk assets are overall in “bubbly territory”.

But it is fair to argue that the current pace of ETF buying is much more muted than that of speculative buying and therefore has a much less significant impact on gold pricing, at least in the near term.

Similarly to speculators, ETF investors pay a close attention to the macro conditions, namely the dollar and US real rates, to decide whether to add or reduce their exposure to gold.

As a result, it is not surprising that ETF investors liquidated a total of 13 tonnes as of June 14, the largest net daily outflow since December 14, 2016, after the dollar and US real rates showed renewed signs of strength in the wake of the Fed’s meeting.

That said, I don’t believe at this stage that investor sentiment toward gold has reversed negatively at this stage.

What’s next?

The June 14 FOMC meeting was a key event for gold because its outcome meaningfully impacted the dollar and US real rates.

(Source: ZH)

What were the key highlights of the FOMC meeting?

  1. The Fed raised its target range for FFR to 1-1.25% from 0.75-1%.
  2. It left its rate outlook for 2017 (one additional rate increase) unchanged.
  3. The Fed said it would “monitor inflation developments closely”, especially given the very disappointing inflation data for May released earlier.
  4. It maintained its balance sheet reinvestment but gave more details regarding the normalisation of the balance sheet.

On net, investors interpreted the Fed’s message (statement + press conference) as slightly less dovish than expected, especially given the poor US inflation print for May.

In this context, it is not a surprise to see gold weakening because the market got caught by surprise, with the dollar and US real rates pushing strongly higher, thereby unwinding some long positioning in gold.

But I think the Fed’s attitude will be eventually bullish for gold. Why?

(Source: ZH)

I think the Fed’s determination to continue the normalisation of its monetary policy in a context where US macro data surprises turn increasingly negative (see chart above) will lead to a more prolonged period of risk aversion.

So far this year, global risk appetite has gradually increased, reflecting easier global financial conditions in spite of the Fed tightening. But this may come to an end when the Fed decides to adopt stubbornly a dovish posture, in spite of clear signs of deterioration in the inflation outlook.

This is likely to prompt investors to cut their exposure to risk-friendly positions, and the downside potential for US equities could be significant in the summer months considering the extent to which the short VIX trade has become overcrowded.

In such a scenario, I expect gold to triumph because investors may start turning to the yellow metal to protect their portfolios. I do believe investors will start considering gold as the only game in town this summer.

Trading strategy

As some of you may know, I decided to implement a long GLD position at $120.74 at the start of June after the clear technical breakout of gold.

Although my current position is under water, I’m not worried from a technical viewpoint.

Let’s have a look at gold.

(Source: NetDania)

After last month’s breakout in gold, it is not surprising to see a retest of the downtrend line. Although gold can come under further downward pressure in the days ahead, I would be comfortable with maintain my long exposure to gold should it close above its downtrend line at the end of the month.

Let’s have a look at the dollar.

(Source: NetDania)

The technical picture for DXY continues to point to further weakness in the weeks ahead. The firm break below the 100-WMA seems to me that the bull market in the dollar has come to a pause. A lower dollar may be supportive of gold.

Finally, let’s have a look at GLD.

(Source: TradingView)

GLD may strengthen in the weeks ahead as a result of the bullish crossover pattern whereby the 20-WMA moved above the 200-WMA, which is a typical bullish configuration.

To sum up, I am adamant that my bullish case on GLD is still valid.

Good trading to my dear friends from the Seeking Alpha community.

About: GLD; Includes: DGL, DGLD, DGP, DGZ, D.

Disclosure: I am/we are long GLD, CAC40.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.