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 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 GLD and other market instruments and discuss possible trade ideas.
Gold. According to the latest Commitment of Traders report (COTR) provided by the CFTC, money managers cut massively their net long positioning over the reporting period (May 2-9) while spot gold prices tumbled by 2.6%.
The net long fund position – at 272.05 tonnes as of May 9 – fell by a significant 135.08 tonnes or 33% from the previous week. This was driven principally by long liquidation (-124.49 tonnes w/w) and reinforced slightly further by short accumulation (+10.59 tonnes w/w).
The net long fund position remains up 149.11 tonnes or 121% in the year to date.
The notable deterioration in the spec positioning in gold over the reporting period was on the back of very negative macro forces against the precious metals complex. Indeed, the dollar and US real rates – the key macro parameters of gold’s spec length – surged strongly as a result of a hawkish Fed repricing after the FOMC meeting on May 3. The Fed guided the market toward a steeper expected path of Fed funds rates by arguing that the softness in US macro data in Q1 was likely to be “transitory”, prompting the market to revise its estimative probability of a 25 bp rate increase at the forthcoming meeting on June 14 up to 88%, according to the CME FedWatchTool.
But considering the strong rebound of ~4% in gold prices from their lows of $1,214 per tonne on May 9, I contend that the net long spec length is expanding again. Interestingly, the rebound in gold seems to be driven by short-covering rather than fresh buying, judging by the notable fall in open interest since May 9.
What does that imply? If I am proven right (we’ll get the answer by Friday May 19 as the forthcoming COTR will cover the period for May 9-16), this means that there will be plenty of room for the “weaker” or “scared” longs who exited their positions over May 2-9 to come back with a vengeance although the macro backdrop for gold needs to remain friendly, that is the dollar and US real rates may remain under downward pressure.
This could certainly be the case should (1) the political risk premium in the US continue to move higher due to the political storm after president Trump allegedly revealed classified information to a Russian diplomat and allegedly asked former FBI director Comey to end investigation of former national security adviser Flynn; (2) US macro data continue to disappoint to the downside and result to a more dovish Fed repricing; and (3) geopolitical risks continue to proliferate.
Gold. ETF investors were inactive last week, dumping only 2 tonnes of their gold holdings, according to FastMarkets’ estimates.
ETF holdings totalled 2,075 tonnes as of May 12; they are down 6 tonnes so far in May after increasing by 29 tonnes in April. In the year to date, gold ETF holdings have increased by 126 tonnes or 7%, 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.
Contrary to speculators, ETF investors were not affected by the noticeable deterioration of the macro environment toward the precious metals complex.
But the macro environment for gold has become friendlier since Monday due to on the one hand, a sudden resurgence of risk aversion triggered a political turmoil in the US, which is reflected in the marked rise in betting odds of president Trump being impeached by 2017 (Figure 1), and on the other a dovish Fed repricing in part owing to an increasingly disappointing string of US macro data, especially in the US housing sector (Figure 2).
Figure 1: Odds of Trump impeachment jump over 30% this week
Source: Predict it.
Figure 2: Odds of a Fed move in June slumps below 70% this week on increasingly negative US macro surprises
Despite this positive macro environment for gold since Monday, ETF investors have not rushed into gold. This could therefore suggests that most ETF investors already did their buying earlier this year to be hedge against a potential sell-off in their equity portfolios.
But this is not my working hypothesis. I think that ETF investors are relatively slower to react to the changing macro environment. As a result, I maintain my view that (1) the deep complacency across the financial markets is coming to (at least) a temporary end and (2) a pronounced equity sell-off will eventually trigger fresh ETF buying interest from retail investors because gold, liquidity constraints put aside, is a better hedge against debasement risks contrary to other traditional safe-havens such as the yen or the Swiss franc,.
Spec positioning vs. investment positioning
Let me first start with my trading view on gold.
Although I have a bullish macro view on gold over a 1M view as you can easily deduce from my thoughts outlined above, my trading activity is triggered if and only I receive a technical confirmation from the chart.
As I explained in my previous reports, the monthly close for April did not convince me to build a long GLD position because gold remained below its critical downtrend line from the all-time high (Figure 3). As a result, I refrained myself from jumping on the long side in GLD (Figure 4), holding the view that gold was not ready to break out on the upside.
Figure 3: Gold spot – Monthly chart
Source: Net Dania.
While I was even tempted to build a tactical short position in GLD, I refrained myself from doing so considering (1) my bullish macro view on gold and (2) the poor YTD performance of my Fund.
Going forward, I’m going to sit tight and analyse the monthly close for May. As you may guess, I would have a strong inclination to jump in the long side in GLD should GLD manage to close above the downtrend line.
Now, let me turn to my trading view on other instruments, most notably the French stock market (CAC 40).
After implementing a long position in the CAC 40 last week and making it clear that it was a long-term position for which I was ready to experience short-term pain considering my negative view on broad equities in a context when the complacency of the market is at its peak, I am this week bleeding money.
The CAC 40 sold off considerably this alongside other major equity indices as investors seem to be inclined to “sell in May and go away” (Figure 5). But my view is unchanged. I treat this as a mere technical correction before French equities reach new highs again. While there is presently no “buyers on the dips”, I expect them to come back sooner rather than later. As a result, I may increase the risk of this position by the end of the month, all else being equal.
Figure 5: French equities – CAC 40
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 my dear friends from 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 am/we are long 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.