I believe that the short-term prices of gold are determined by the gold paper market. That is why the precious metals investors should closely monitor the state of the gold futures market. In my last article on gold, I discussed in what way the investors were positioned for an incoming increase of US interest rates. In this article, I am discussing what happened after the last rate hike.
COT reports - the last developments
The tables below show net positions held by big speculators (mainly hedge funds) ahead of and after the Fed meeting. Apart from gold and silver futures, I have plotted two other instruments impacting the precious metals market, namely 10-year treasury notes and the US dollar:
Source: Simple Digressions
1. First of all, note that after the Fed meeting, the speculators increased their long bets on gold prices - the net long position held in gold futures went up from 106.0 thousand contracts on March 21, 2017 (ahead of the Fed meeting) to 116.3 thousand contracts on March 24 (after the Fed meeting).
2. The net long position held in silver futures decreased by 3.8 thousand contracts. Contrary to the speculators in gold futures, the speculators in silver futures became less optimistic on silver prices. However, despite this event, a general pattern delivered by the silver paper market still remains bullish - the speculators hold large net long positions in silver futures.
Interestingly, after the Fed meeting, a net short position held by big speculators in 10-year treasury notes futures was reduced once again. It looks like the negative sentiment among big speculators is rapidly dissipating. Now, these speculators hold quite a low net short position amounting to 94.0 thousand contracts. To remind my readers, one month ago, they were heavily betting on lower prices of treasury notes (holding a net short position of 394.7 thousand contracts). Of course, it is still too early to say that the current pattern supports higher prices of US treasury notes (and lower yields/market rates), but the shift in sentiment is very impressive.
In my opinion, much lower negative pressure on the prices of US treasury notes (evidenced by a much lower net short position held by big speculators) should have a neutral or even positive impact on gold prices. Why? Look at the chart below:
Source: Simple Digressions
The chart shows that the short-term prices of gold go opposite to the yields delivered by 10-year treasury notes. What is more, as the blue, dotted arrows show, even stable yields (the upper panel of the chart) may support higher gold prices (the lower panel of the chart). Therefore, much lower net short positions held by big speculators in 10-year treasury notes should have a stabilizing effect on market rates. Hence, gold prices may stay at current levels or keep on marching up.
3. The Fed decision had no impact on US dollar futures. Ahead of and after the Fed meeting, the big speculators were cutting their long bets on the US dollar. It is common knowledge that the stable or weaker US dollar is supporting stable or higher gold prices.
Chart of the week
Now, let me show the chart of the week:
Source: Simple Digressions
The chart shows the so-called "spreading" figures and the SPDR Gold Trust ETF (NYSEARCA:GLD) prices. To remind my readers, according to the U.S. Commodity Futures Trading Commission:
"Spreading" is a computed amount equal to offsetting long and short positions held by a trader. The computed amount of spreading is calculated as the amount of offsetting futures indifferent calendar months or offsetting futures and options in the same or different calendar months"
In other words, if a trader holds a long position in gold futures amounting to 10 contracts and, at the same time, he/she holds a short position in gold futures amounting to 10 contracts, such a position is reported as the spreading of 10 contracts.
Now, look at the chart. It looks like the gold traders are becoming uncertain about the direction gold prices are heading for. Last week, big speculators were holding a "spreading" position of 64.5 thousand contracts. Due to the fact that I measure each position held by gold futures traders against the total open interest in gold futures, a "spreading" position was 14.4% (64.5 thousand contracts divided by the total open interest of 446.9 thousand contracts). The highest uncertainty was on January 21. On that day, the spreading figure was standing at 19.2% so now we are very close to this reading.
What does it mean? Well, as a rule, high uncertainty precedes a large move in prices, but the direction of this move is unknown. Therefore, it is very important to look at the markets linked to the gold market as, for example, the treasury notes and US dollar market. As I discussed above, these markets deliver an important message - a negative pressure on gold prices is relatively low or even contained.
Summarizing, I do not think that gold prices are ahead of another selling wave. However, due to high uncertainty about the direction the gold prices are heading for, I would bet on stable gold prices in the nearest future.
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.