- Money managers are net long gold for the first time in nine weeks. Short-covering is the driving force.
- ETF investors bought 14 tons in the second week of 2016. Gradual inflows should continue in Q1.
- A more gradual Fed tightening cycle could be gold-friendly.
- We implemented a long GLD position on January 6 at $104.
Every week, we closely monitor net speculative positions on the COMEX as well as ETF holdings inasmuch as the historical economic behavior of gold prices suggests that over a short-term horizon (<3 months), gold prices are largely influenced by changes in the forward fundamentals, reflected in changes in net spec length and ETF holdings.
According to the latest Commitment of Traders report provided by the CFTC, money managers, viewed as a relevant proxy for speculators, swung to a net long position for the first time in nine weeks in the week ending January 12, while spot gold prices edged 0.81 percent higher over the period covered by the data (January 5-12).
The net long fund position now stands at 92 contracts, up 16,019 contracts from the previous week. The improvement in spec positioning for the second straight week was chiefly attributed to short-covering of 12,843 contracts and reinforced by long liquidation of 3,176 contracts.
In line with our expectations, the overstretched speculative positioning has led to a strong wave of short-covering, pushing the net spec length to long territory, which reflects a positive swing in spec sentiment in favour of gold.
But interestingly, gold prices have failed to bottom out tangibly since the start of the year. Many market participants are therefore questioning the sustainability of the strengthening in gold prices. Our understanding is that the improvement in spec positioning is set to continue over the coming weeks, which will eventually lead to a clearer upward trajectory for gold prices.
Looking ahead, we continue to expect gradual increases in the net spec length toward “normal levels”.
ETF investors bought gold for the second straight week of 2016, pushing total ETF holdings up to 1,511 tons as of January 15.
ETF investors bought a total of 14 tons of gold last week after accumulating 10 tons in the prior week. We believe that tactical investors were inclined to further increase their long exposure to gold with the expectation that the recent turbulence in the financial markets will force the Fed to revisit its current monetary policy normalisation process. Indeed, St. Louis Fed Bullard expressed concerns in a recent speech, indicating that the renewed sell-off in oil prices over the past few weeks has resulted in a worrisome fall in US market-based inflation expectations. Since oil prices are expected to remain at a low level for some time, this could undermine the anchoring of inflation expectations and prompt the Fed to remove accommodation in a more gradual way.
So far this year, ETF investors have bought 24 tons of gold after liquidating 24 tons in December and 44 tons in November, according to FastMarkets’s estimations. As a reminder, ETF investors sold 112 tons of gold in 2015, after liquidating 158 tons in 2014 and 889 tons in 2013.
Looking ahead, we expect further ETF inflows over the next few weeks, as the current macro environment will probably exert further downward pressure on US real interest rates, prompting ETF investors to accelerate their buying. In addition, we expect a stable dollar as upward pressure from geopolitical tensions may be more than offset by downward pressure from a dovish Fed which would then lead investors to revisit more positively their outlook on gold prices, we feel.
Spec positioning vs. investment positioning
My GLD positioning – weekly chart
Last week, SPDR Gold Trust ETF (NYSEARCA:GLD) market action was disappointing, leading some market participants to question the sustainability of the rally which began two weeks ago.
From a technical perspective, the 20 WMA is acting as a strong resistance, preventing GLD to break out to the upside. The RSI is slightly oversold, suggesting that there is some room for upside over the weeks ahead.
We built 50 percent of our long GLD position at $104 on January 6, with a stop loss at $100, and a target profit at $119, offering a risk-reward ratio of 1:3.75 (see our article).
As we mentioned last week, we were tempted to complete our long GLD position on a possible pull-back, taking advantage of the volatile environment. But we did not make any move because we believe that weakness could continue this week, allowing us to complete our long GLD position at a better price.
To sum up, we continue to see an upward trend trajectory for GLD over a 1 to 3 month horizon although a sharp break below $100 would lead us to revisit our bullish view.