Gold And Gold Stocks: Positioning And Sentiment

by: Acting Man

Commitments of Traders

Last week's commitments of traders report (cut-off date Tuesday May 21) showed little change (approx. 3,500 contracts net), but only about 83,000 contracts remain of the large speculator net long position in the 100 ounce COMEX contract. Since the price declines later in the week are not captured in this report, further changes have since then presumably occurred. Again, it is not bullish when the large speculator gross short position increases and it is still doing so (currently at 103,195 contracts). Gold has given a new MACD sell signal on the daily chart, so these short positions have probably increased further. That may change if the test of the April crash low is successful, which currently appears to have low probability due to gold stocks having reached lower lows late last week.

Gold, commitments of traders. Small speculators are now neutral and the large speculator net long position is at a new low for the move - click to enlarge.

Closed End Funds and the Rydex Precious Metals Fund

One way of measuring enthusiasm for precious metals is the premium or discount to the net asset value of closed end funds that hold bullion. As an aside to this, in an open-ended fund like GLD said enthusiasm is visible in inflows and outflows from the fund, as differences between market prices and the fund's NAV are subject to arbitrage. Contrary to what many mainstream analysts regularly maintain, the tonnages flowing into or out of GLD hardly matter to the gold market. The amounts are simply too small - since the gold market's total supply is approximately 175,000 tons, it is not terribly important whether GLD gains or loses a few hundred tons in the space of half a year. All the inflows and outflows are testifying to is general sentiment toward gold. In the case of closed end funds, this can be seen in terms of premiums and discounts to net asset value. Note that discounts to NAV are a relatively rare occurrence in these funds. Below we show a short term chart of CEF (which holds both gold and silver) as well as a longer term chart of GTU (gold only) to illustrate the current situation.

CEF's premium/discount to NAV. The persistence and size of the current discount is a rare event.

A long term chart of GTU showing its premium/discount to NAV. The recent discount is in fact a record.

We also want to show an update of the Rydex precious metals fund, specifically the cumulative cash flows into and out of the fund. We have previously discussed the emerging divergence between the fund's price and its cumulative cash flow ratio, and it is noteworthy that it continues to persist. This must count as a slight positive for precious metals shares, as such divergences usually precede trend changes. However, there is a caveat: the divergence has been in evidence for about ten months now, and has obviously so far not had any positive effect. That does however not mean that one should dismiss it out of hand, only that it cannot guarantee a specific short term outcome. Let us just say, it would be worse if there were no such divergence in evidence.

The Rydex precious metals fund and the divergence between the fund's price and its net cash flow ratio.

Finally, we wanted to briefly mention how Credit Suisse most likely divined its long term price target for gold. It turns out they didn't just make it up - instead, they must have looked at a linear long term chart of gold. As noted last week, on the long term log chart, there is an uptrend line that was tested by the recent crash low.

On a linear chart, the long term uptrend line that connects the 2008 low with previous lows is much flatter and points to a potential price target in the $1,100 to 1,200 range. The chart illustrating this is below:

A linear long term chart of gold's bull market. There is a trend line that was probably used by Credit Suisse to arrive at its price target for the current cyclical bear market.

Incidentally, at the $1,100 level, the correction would be almost equivalent in size to the mid 1970's downturn. Whether gold will really get there remains of course open to question.


To say that market participants currently show no enthusiasm toward gold would be an understatement. The anecdotal evidence of negative opinion is echoed in positioning and other sentiment data. As to when these extremes will become 'too much', that remains to be seen, especially given the technical feasibility of lower price targets for gold. Regarding the 'test' of the April crash low, note that such a test doesn't necessarily mean that the exact same price level will be revisited - a slightly higher or slightly lower low would serve as well, as long as prices begin to rally from there. Unfortunately gold mining stocks currently indicate a low probability of a successful test, but we'll cross that bridge when we get there.

Futures positioning hasn't turned entirely negative yet, as the 'bedrock' large speculator long position is still intact (however, this also means that further liquidation pressure could yet ensue). The Rydex precious metals fund's price/cash flow divergence counts as a medium/longer term positive.

Charts by: Sentimentrader, Decisionpoint, Bloomberg