Heresy - Gold And The US Dollar Are Bottoming At The Same Time

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Includes: AGQ, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, OUNZ, PHYS, PSLV, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, UBG, UDN, UGL, UGLD, USDU, USLV, USV, UUP, ZSL
by: Simple Digressions

Summary

Last week big speculators trading in gold / silver futures became even more pessimistic about precious metals prices.

I have to say the same about the speculators trading in US dollar index futures.

I know it sounds like heresy, but these two facts stand behind my short term bullish opinion on precious metals and the US dollar.

Last week was a continuation of the previous week’s developments at the markets related to precious metals. Here is the table depicting the changes in net positions held by big speculators (mainly hedge funds) in these futures markets:

Source: Simple Digressions and the COT data

10-year Treasury notes

10-year Treasury notes are one of the biggest supporters of the precious metals sector. Despite a slight decrease in a net long position held by big speculators in these futures (a cut by 5.9 thousand contracts), these traders are still very optimistic about Treasury prices (and pessimistic about market interest rates). To remind my readers, the general rule is that low or lower interest rates support stable or higher gold / silver prices.

US dollar

The traders in US dollar index futures have lost their interest in this currency. The total open interest in US dollar index futures went down from 148.5 thousand contracts in early March 2015 (the point A on the chart below; at that time big speculators were extremely optimistic about the greenback) to a mere 50.7 thousand contracts on March 3, 2017 (the point B on the chart below):

Source: Simple Digressions

I think there is no need to say that now the big speculators are extremely pessimistic about the US dollar (my US dollar sentiment index is close to 0% now). It means that a bottom in the US dollar index may be in.

Gold and silver

Interestingly, last week my gold and silver sentiment indices entered even more oversold conditions, compared to the previous week (now the gold sentiment index stands at 18.9%; in the case of silver it stands at 8.3%):

Source: Simple Digressions

What is more, the silver short / long position ratio (defined as the total number of short positions / total number of long positions held by big speculators in silver futures) entered the range of readings indicating a medium-term buying opportunity for silver (the yellow area on the chart below):

Source: Simple Digressions

Note that whenever there was a sudden spike in the ratio driving it above 0.8 (the yellow area on the chart above), there was a short or medium-term bottom in silver prices. Now we have such a situation. Interestingly, a probable bottom is silver prices coincides with a similar probable bottom in the US dollar. Yes, we live in interesting times…

Physical markets

The demand for silver bullion is strong. For example, since early March 2017 the Shanghai Futures Exchange has been reporting the cuts in its silver stocks:

Source: Simple Digressions and the Shanghai Futures Exchange data

It looks like lower silver prices are driving up the demand for silver.

Western investors, using the iShares Silver Trust (SLV) as their silver vault, were also very active in the first half of July 2017:

Source: Simple Digressions

This month, taking the advantage of lower silver prices (a drop of 4.0% in July up to now), they added as many as 9.4 million ounces to SLV.

Summary

I think that the short or medium-term bottom in gold and silver may be in. Interestingly, I should say the same about the US dollar – the pessimism among US dollar speculators has reached its extreme readings.

As I discussed in my last article on the precious metals sector, both precious metals and the US dollar seem to be bottoming. It is an unprecedented situation but…we have to live with it.

Note: Those interested in my sentiment indices may check them out on my Marketplace service.

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.

Additional disclosure: I hold a long position in gold futures

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