A Bullish Thesis About Gold Is Stronger Now

| About: SPDR Gold (GLD)


According to the COT reports, speculators in gold futures are still quite pessimistic about gold prices.

Most recently, two large private holders of bullion gold, GLD and IAU, have reported a strong build-up of gold stocks.

It looks like the US real interest rates are ripe for going down.

In my opinion, these developments support my bullish thesis about gold.

In my last article on gold, I gave the following summary:

  • According to the COT reports, Money managers are no longer uncertain about the future.
  • However, they are rather pessimistic about the gold market.
  • The so-called Commercials have just started to build their short positions in gold futures but the size of their bet is relatively small.
  • Lastly, the SPDR Gold Trust reports gold inflows into its vaults.

I believe that since last week, this summary is even more supported by a few factors discussed below.

COT Report

Although the last COT report delivered no essential information, a medium-term pattern, positive for gold prices, is emerging. For example, it looks like the net long position in gold futures, held by the so-called Money managers, has just bottomed:

Source: Simple Digressions and the COT data

The chart shows that in the summer of 2016 Money managers were holding the highest net long position in history, amounting to 45.6%.

Note: Contrary to other analysts, I measure the size of a position held by a group of players in gold futures against the total open interest. For example, on September 6, 2016, Money managers were holding a long position in gold futures amounting to 291,700 contracts. At the same time, these players were holding a short position in gold futures amounting to 22,200 contracts. So a net position was LONG and its size was 269,500 contracts (291,700 less 22,200). On that day, the total open interest in gold futures was 590,700 contracts. As a result, Money managers were holding a net long position amounting to 45.6% (269,500 divided by 590,700).

Then, within a few months, gold prices fell from $1,360 to $1,120 per ounce. At their bottom, the Money managers were holding a much smaller net long position of 12.5% (early January 2017 - the circle marked in black).

Now, let me assume that gold is now in its bull market phase and the early January price of gold of around $1,130 per ounce was a medium-term low. It means that in the coming future, the prices of gold should print higher lows accompanied by higher net long positions held by Money managers.

A similar pattern was visible between October 2006 and October 2008. The chart shows three circles marked in red (1, 2, 3), which are attributed to higher lows printed by gold prices during the previous bull stage in gold. Note that each higher low was accompanied by higher net long position held by Money managers in gold futures.

In other words, if I am right and we are in a bull market in gold, the subsequent corrections in gold prices should end at higher prices than the previous retreat (that is a definition of a bull market). Additionally, Money managers should be more optimistic on gold during each correction. Hence, their higher net long position over the developing bull cycle.

Summarizing - the last low in the net long position held by Money managers in gold futures (12.5%) may be considered as a reference point for gold traders.


I have stated many times that to see higher gold prices, we should see investors buying physical gold. To track physical demand, I am using the SPDR Gold Trust (NYSEARCA:GLD), the world's biggest private entity hoarding gold bullion. The recent data delivered by GLD is optimistic (look at the circle marked in green):

Source: Simple Digressions and the GLD data

As the chart shows, since the beginning of February 2017 as many as 1.3 million ounces of gold have been accumulated in GLD vaults.

What is more, another large ETF, iShares Gold Trust (NYSEARCA:IAU), has been also accumulating gold:

Source: Simple Digressions

Since the beginning of 2017, both GLD and IAU have added 601,000 and 163,000 ounces of gold to their vaults, respectively. On the other hand, the COMEX reported an outflow of gold. Since the beginning of this year, 248,000 ounces of gold were withdrawn from this market. Interestingly, JPMorgan, one of the largest players in gold futures, has added 166,000 ounces of gold to its vaults at the COMEX.

10-Year Treasury Rates

My bullishness about gold is also supported by real interest rates and 10-Year US Treasury notes. Generally, gold prices go up when US real interest rates go down:

Source: Simple Digressions

Note that the most dynamic stage of the bull market in gold was between November 2008 and November 2012 when US real interest rates went down from 2.9% to minus 0.8%. In that period of time, gold prices went up from $725 to $1,720 per ounce. Then the real interest rates started to go up, dragging down gold prices.

Now, the chart below shows the US inflation rate, starting from 2010:

Source: Statbureau

The chart shows that since the end of 2014, the US inflation rate has been in its upward trend. Now this rate stands at 2%. Let me assume that inflation is constant over the next year.

Further, a real 10-year interest rate is a difference between the inflation rate and the current 10-year Treasury note yield. Today, these notes are yielding 2.44% so the real 10-year interest rate stands at around 0.44%. However, according to the COT reports, it looks like the prices of US 10-year Treasury notes are ripe for going up:

Source: Simple Digressions and the COT data

Using the data delivered by the COT reports, a few weeks ago, the Commercials held one of their highest net long positions in US Treasury notes futures in history (around 20%, measured as their net long position divided by the total open interest). In the past, such high net long position was an indication of a buying opportunity (the area marked in yellow). If I am correct, the prices of 10-year Treasury notes should go up (which means that 10-year yields should go down). Assuming a stable inflation rate, lower 10-year yields should result in lower 10-year real interest rates. Lower real interest rates are supporting higher gold prices so the current pattern reported by the COT report is bullish for gold.


In my opinion, a bullish thesis on gold is supported by a few important factors. The COT reports give evidence that speculators (Money managers) are rather pessimistic on gold. Throughout history, the deep pessimism among speculators was indicative of higher gold prices in the future.

Apart from that, most recently, American investors have started accumulating physical gold again. My readers know that I put great emphasis on the physical demand for gold.

Lastly, it looks like the US 10-year Treasury notes are ripe for another rally. Such a rally could have a negative impact on real interest rates (dragging them down). In my opinion, lower real interest rates are a huge catalyst for higher gold prices.

Disclosure: I am/we are long GDXJ.

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.

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