Gold Weekly: Thunderstorm Warning…


Welcome to my latest 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 cut notably their net long positioning over the reporting period (February 28 – March 7) while spot gold prices weakened by 2.4%.

The net long fund position dropped by a significant 68.04 tonnes or 21% week-on-week (w/w) to 255.85 tonnes as of March 7. The fall in the net long fund position was driven mainly by long liquidation (-45.81 tonnes w/w) and further reinforced by short accumulation (+22.22 tonnes w/w).

The net long fund position remains up by 132.91 tonnes or 108% in the year to date. Still, it represents only 33% of the all-time record (774.16 tonnes) reached last year.

My view:

In line with my expectations, the increase in the net long spec positioning two weeks ago (gold’s net spec length climbed by 103 tonnes or 46% w/w over February 21-28) was too excessive and thus warranted a normalization.

The macro backdrop last week (February 28 – March 7) was conducive of net speculative selling. Indeed, the dollar was stronger (the DXY was up from 101.120 to 101.810) while US real rates surged (the 10-year US TIPS yield moved from 0.3766% to 0.4839%) on the back of stronger Fed tightening expectations thanks to positive US macro surprises and hawkish Fed speak.

The question is now this. With the 25bp rate increase by the Fed fully discounted by the market, will the accompanying statement surprise to the hawkish side (the Fed may guide the market toward four hikes this year) or the dovish side (the current pace of tightening – 3 rate hikes – remains the FOMC base case).

I think the Fed has been increasingly seduced by “March move” for technical reasons rather than fundamental factors. Among these technical reasons, I note that 1)the market currently embraces a rate hike, which is healthy and 2)there is a press conference so Fed Chair Yellen has the occasion to communicate clearly the Fed’s view.

In consequence, I expect a short-term pull back in the dollar and US real rates after the FOMC meeting on Wednesday, which could prompt speculators to re-build tactical long positions in gold. That said, I emphasize that any consolidation in the dollar or fall in US real rates should prove transient as the reflationary environment is here to stay, which leads me to think that speculators will become increasingly uncomfortable with their current “bullish” positioning on gold.

Investment positioning

Source: FastMarkets.

Gold. ETF investors liquidated their holding by 17.25 tonnes or 1% w/w over March 3-10. According to FastMarkets’ estimates, ETF holdings amounted to 2,027 tonnes as of March 10. The selling pressure was concentrated on March 3 (-5.63 tonnes) and March 10 (-9.52 tonnes).

My view:

The surge in ETF outflows on March 10 was should not be a surprise because the release of the US jobs report for February was robust (NFP: +235K vs. +185K expected, UR: 4.7% in line with expectations 4.7%, AOE: +0.2% m/m vs. +0.3% expected) and therefore cemented a March hike.

Indeed, investors have strong conviction that the Fed will move this week after recent comments from Yellen on March 3:

“At our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”

But like speculators, investor behavior will depend on the tone of the FOMC statement to better assess the expected path of Fed funds rate. Similarly to what happened in December last year, I would not be surprise if the Fed accompanies a rate hike (the slap) and a reassuring dovish message (the kiss) to prevent the financial market from derailing. As a result, I expect the macro environment to become slightly better for precious metals in coming days, which could transpire into gold ETF inflows.

Apart from the Fed’s decision, the Netherlands will hold parliamentary elections the same day (March 15) and recent polls suggest that Geert Wilders, the right-wing nationalist, is gaining ground as the Dutch welcome the hard stance adopted against Turkey. There is a risk that geopolitical tensions continue to rise as populism continues to grow among Europeans.

So far, risk sentiment has remained resilient but I fear that a wave of monetary policy tightening (Fed, BoJ, ECB, and PBOC) puts an end to this stable macro environment. But I would argue that even if risk aversion resurges, macro investors seem to have already built risk-unfriendly positions like gold to protect their portfolios. Indeed, ETF investors have already bought about 77 tonnes of gold so far this year, corresponding to an increase of 4%.

To sum up, I believe that the more hawkish attitude from the Fed combined with the less dovish stand recently adopted by major central banks (e.g. ECB, BoJ, PBOC) is likely to reinforce the reflationary environment, which should result in a stronger dollar and higher US real rates, which in turn may undermine ETF demand for gold in coming weeks and months.

Spec positioning vs. investment positioning

Source: MikzEconomics.

SPDR Gold Trust ETF (NYSEARCA:GLD) positioning

Source: TradingView.

Technical view

SPDR Gold Trust ETF (GLD) remains under downward pressure this week after dropping by 2.46% last week.

The key weekly moving averages are downwardly slopping and may thus exert downward pressure in coming weeks. My momentum-oriented indicators continue to point to weakness, boosting my conviction that the year-to-date rally has now become exhausted.

A weekly closing below 20 WMA would suggest that the ball is now in the bear camp, triggering some momentum-based selling. Conversely, a firm weekly closing above the 20 WMA may reflect an upswing in sentiment.

Global macro view

SPDR Gold Trust ETF (GLD) remains weak at the start of the week ahead of the much awaited conclusion of FOMC meeting on Wednesday. Despite looming political and macro risks, investors remain incredibly calm, pressure the volatility across most risk asset classes at low levels. In this context, GLD is not bid.

Trading strategy

I decided to implement a short GLD position on March 6 at $116.75 with a stop-loss level at $120.40. I have a target profit of $100, which I expect to be reached over the coming months. The success of my bearish bet will be heavily dependent on the degree of reflationary pressure. The risk of my position represents about 1% of my Fund.

Contrary to most gold bears, I’m not very greedy. In fact, I accept that I may be too early and that the uptrend in GLD will resume toward my initial resistance target at $122.50, which corresponds to the downtrend line since the 2011 high. But my stop loss is tightly place and congruent with my current conjecture.

Apart from GLD, I may be tempted to take a bearish bet on CAC 40 because there is presently an excessive level of optimism, which should end sooner rather than later given the looming political elections. I may implement a short position by the end of the month and the size of the position will be relatively small.

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 am/we are short GLD.

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.