Gold Weekly: Ready To Take Off?

Introduction

Welcome to my Gold Weekly. In this report, I wish to discuss my short-term views about the gold market. To do so, I will analyze 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 GLD and other market instruments and discuss possible trade ideas.

Speculative positioning

Source: CFTC.

Gold. According to the latest Commitment of Traders report (COTR) provided by the CFTC, money managers lifted their net long positioning for a fourth straight week over the reporting period (April 4-11) while spot gold prices rallied by 1.5%.

The net long fund position – at 377.08 tonnes as of April 11- surged by 67.71 tonnes or 22% from the previous week. This was influenced mainly by long accumulation (+46.53 tonnes w/w) and reinforced further by short-covering (-21.18 tonnes w/w).

The net long fund position is now up 254.14 tonnes or 207% in the year to date.

My view:

The improvement in the spec positioning in gold over the reporting period was driven by a notable pull back in the dollar and US real rates caused by a combination of weaker US macro data (e.g. US jobs report for March), a less hawkish tone adopted by the FOMC during its latest meeting (see the Fed minutes), and more importantly, the surge in geopolitical tensions in the Middle East surrounding Syria and in Asia relating to North Korea.

Although gold’s net long spec positioning has improved remarkably in the year to date, it does not appear overstretched, in my view. According to my estimates, the net long fund position represents just 49% of its all-time record established last year.

As a result, a continuation of friendly macro forces for the precious metals complex could elicit a significant wave of speculative buying in the coming weeks. Interestingly, gold prices are trading close to their psychological level of $1,300 per oz. I contend that a firm break above this level would lead most CTAs (trend followers) to lift significantly their net long exposure to gold, pushing prices much higher.

Investment positioning

Source: FastMarkets.

Gold. ETF investors bought 19 tonnes of gold last week, corresponding to an increase of 1% in gold ETF holdings.

According to FastMarkets’ estimates, ETF holdings totaled 2,059 tonnes as of April 18, up 24 tonnes so far in April, after rising 8 tonnes in March, climbing 94 tonnes in February, and being unchanged in January.

The pace of ETF buying so far this year remains smaller than that of last year.

My view:

There is still not a meaningful gold demand response from investors to the challenging macro and political backdrop.

Despite the intensification in geopolitical tensions in the Middle East and Asia and the higher political risks in Europe as a result of the approach of the first round of the French elections (Sunday April 23), macro investors have been relatively calm.

Yes, it is true that the volatility in the gold market and risk asset classes such as FX or equities has been picking up of late, but there is nothing alarming so far. As a result, it is fair to argue that the market could be caught by surprise in case of tail risk events.

Investors will therefore pay a close attention to the outcome of the first round of the French elections this weekend, with the most market-unfriendly outcome being a win by Far-Right Le Pen and Far-Left Melenchon. In this event, a notable pullback in global risk appetite may ensue, which could lead macro investors to bid significantly safe-havens, in particular gold. The probability of this event is to take seriously, judging by the latest opinion polls.

Source: UBS.

Looking ahead, I contend that a Le Pen/Melenchon win in the first round would elicit significant inflows into gold ETF holdings, pushing prices higher.

Spec positioning vs. investment positioning

Source: MikzEconomics.

Trading strategy

I am on the sidelines with a positive bias. In fact, I am monitoring closely the technical picture in gold and stand ready to implement a long position in GLD under certain conditions, as I discussed in a previous article.

SPDR GOLD TRUST ETF (NYSEARCA:GLD) – Weekly chart

Source: Trading view.

As can be seen above, GLD remains in a downtrend (i.e. below its DTL from its all-time high reached in 2011).

GOLD SPOT – Monthly chart

Source: Net Dania.

As can be seen above, gold is currently fighting with its downtrend line at $1,276 per oz. If gold manages to close above this key level by the end of the month, I would be willing to take a significant long position in GLD to play the coming new bull market.

For the sake of transparency, I will publish my open and closed trades on my Twitter account and at the end of each of my Gold Weekly reports.

Good trading to the Seeking Alpha community.

About: SPDR Gold Trust ETF, Includes: PowerShares DB Gold ETF (NYSEARCA:DGL),VelocityShares 3x Inverse Gold ETN (NASDAQ: DGLD), DB Gold Double Long ETN (NYSEARCA: DGP), DB Gold Short ETN (NYSEARCA: DGZ) SPDR S&P 500 Trust ETF (NYSEARCA:SPY)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.