Speculators Significantly Reduce Exposure To Gold

by: Peter Ruud

Speculators reduce exposure in gold and S&P 500 futures.

Euro speculation reaches new extreme.

Bond traders continue to favor the long end of curve.

Speculators significantly reduced exposure to gold and S&P 500 futures, according to the latest Commitment of Traders (COT) report. Equity markets, meanwhile, continue to ignore the warning signs, closing the week at fresh record highs on the back of tax bill hopes. Elsewhere, euro speculation reaches another extreme and (non-commercial) Treasury bond traders continue to favor the long-end as the yield curve continues to flatten.

Gold futures (bullish) sentiment fell significantly, according to the latest COT report, as the number of (gross) long contracts were reduced by 25% and the number of (gross) shorts increased nearly 22%. As a result, net longs fell to 68% (as of Dec. 12th) from 76%, the week prior. Meanwhile, Gold futures managed to recover off 5-month lows, finishing the week up over a percent. According to the latest retail positioning data, retail traders continue to buy in anticipation of a turn in the yellow metal.

While, gold futures technically turned (back up) last week, in order to follow the similar pattern seen back in May and July, the price of gold will have to move higher without hesitation in the short term. This means that the critical 1262/63 level will need to be cleared in the next week, in order to confirm the so-called "turn" in gold prices. The 200-day moving average and the key 50% retracement coincide with the next upside target at 1270 ahead of the 50-day moving average at 1277. If, gold futures, however, fail to clear the 1262/63 threshold, then the 1240 region will likely be re-tested.

The (trade-weighted) Japanese yen and Gold futures have remained tightly correlated for some time, and in terms of price-action, both had fallen markedly since the end of November and both recovered last week. Yen speculators, however, are extremely (net) short and hover near the largest (net) short position for the year vs. the USD.

Meanwhile, the retail population has started to decrease their net long position (yen vs. USD) to 47% from 52%, just a week prior. If the retail population continues to sell, there's plenty of room for speculators to buy, given only 18% of the total (non-commercial) contracts outstanding are long. That said, while price-action in the USD/JPY remains north of the key 112 mark, technically there's a high probability of re-testing key resistance at 114.33.

If, however, the USD/JPY, manages to slice through key support at 112, then only 111.67, where two key moving averages reside, protect the 110.87/111.00 area from being re-visited to the downside.

The latest COT report revealed once again that speculative euro positioning by non-commercial traders improved and reached another record net long position. While, majority of the (up) move in sentiment was due to a reduction of short positions, it demonstrates that speculators remain extremely optimistic despite ongoing seasonal headwinds that have allowed for the euro to consolidate the past few months since reaching a trade-weighted cyclical high in September.

According to recent retail trading data, the retail population may have turned (lower) last week after reaching a 6-month high in terms of EUR optimism vs. the USD. If this indeed marks a turn in retail sentiment, it suggests that the EUR/USD could start to grind higher, but due to a very crowded speculative crowd, may only see limited upside.

If the EUR/USD fails to maintain support in the 1.1709/24 region, the October lows (in the 1.1554 region) could be at risk of being re-tested. That said, if the EUR/USD manages to close (a day) above 1.1820, then momentum would quickly shift to the 1.1950 region ahead of the 2017 highs in the 1.2050/88 area.

The most recent COT report highlighted that the overall (net long) position in British pound futures is now trending higher again, as it advanced for the 5th straight week to reach 54%. The retail FX population, however, has seemingly ceased scaling back their net long position, which could put additional downward pressure on the GBP/USD if last week's turn in retail sentiment continues. That said, it appears that Friday's sell-off may have exhausted near-term bear momentum, and while 1.3290 holds-up as support, price-action could drift back within last week's range. If, however, the key 1.3290 pivot fails to hold to the downside, then the 1.3220/35 region should be exposed ahead of 1.3050/63 region.

Bullish sentiment by Australian dollar (futures) speculators dipped once again, highlighting the gradual unwind from September's extreme (net long) positioning. The more important development surrounds the move in retail sentiment. According to the latest retail FX positioning data, the retail trading population has turned on the AUD/USD by selling it, bringing the net long percentage down to 64% after reaching a 2017 peak of 76% just a week ago.

It should be noted that recent extreme level in sentiment by short-term momentum traders has coincided with a turn in price-action in the AUD/USD for the 3rd time this year. That said, price-action has only retraced a small portion of recent weakness and will need to clear .7730 to the upside to help the AUD/USD shift focus back towards the key .7820/.7900 area again.

Canadian dollar futures (bullish) speculation has steadied as of late, but remains extremely high, as positioning remains near the highest level of net longs (by percentage) over the past 5 years. Meanwhile, the USD/CAD ended the week thrusting higher towards the upper-end of the consolidative range that has persisted since late October. A clean break above the 1.2900/20 region would indicate a key technical shift attention to the psychological 1.30 threshold ahead of the 1.3125 area. That said, if the retail sentiment has turned (lower), as potentially indicated towards the end of last week, then it's possible that the CAD could be entering a bottoming situation similarly to the Aussie.

Crude oil futures sentiment remained near extremes, as positioning by futures traders (into Dec 12th) inched up by roughly 3K contracts. The net long position continues to hover near the highest level by percent of the year, as the short covering trend has continued as of late.

Meanwhile, crude oil prices have consolidated since reaching a fresh 52-week high about a month ago. That said, recent price action is forming a triangle pattern, why typically represents a continuation pattern for the ongoing trend. At this juncture, a clean break above the 58 handle should re-invigorate a potential move towards the 2015 highs just above the 60 region. The technical reaction there, however, will be critical in determining how much further oil prices can run in the face of extreme (LONG) positioning by speculators.

E-mini S&P 500 futures continue to mark fresh all-time highs despite sentiment turning more cautiously. In the latest COT report, futures speculators pulled-back significantly, trimming their gross longs by nearly 90K contracts and adding roughly 30K in gross shorts. The overall uptrend in S&P 500 futures, however, while technically overbought (weekly indicators), should remain intact while maintaining support by 2620. If volatility were to increase due to end of year tax selling, a clean break of the 10-day moving average would be enough to merit a correction towards the 2542/53 area.

It should be continued to be noted, however, that topping processes typically take time (at this stage of the trend), and so far there's only minor evidence to suggest that equities overall have begun to temporarily top out. A lack of follow-through strength to begin next week could provide confirmation of Friday's bull exhaustion, potentially laying the foundation for more 2-way price-action into the final weeks of the year.

Nasdaq 100 futures speculator sentiment continues to highlight the divergence with price action. As price-action continues to reach all-time high, the level of speculative sentiment continues to remain near the lowest level (net long) for the year. The recent bout of volatility should be a cause for some concern, especially since daily and weekly indicators are potentially setting-up negative divergence. Also, it appears from a weekly and daily (chart) perspective that Friday's thrust higher could represent a buying exhaustion, as price-action not only finished at the high of the day, but finished at the high of the week.

While, these formations often reverse into new week, because of the bullish momentum looming from ongoing hopes of a tax bill, if follow-through strength is seen to start next week, then Friday's exhaustion signal would be negated.

US 10-Year futures bullish sentiment remained relatively upbeat, as non-commercial traders accumulated both gross long and short positions, but added roughly 30K contracts to the net (LONG) total. The bump-up in long positioning comes after the prior week's substantial reduction, suggests that futures speculators remain positioned towards further yield curve flattening.

While 10-year yields dipped after last week's FOMC, while an upward-tilted ridge of support in the 2.30/32% region remains intact, the immediate focus will continue to be whether 10-year yields can close a week above 2.40% for the 1st time since March.

US 30-year futures speculators continued to add to their slightly bullish stance, according to the latest COT report. Meanwhile, the latest move in 30-year yields now highlights another lower top near 2.80%. And, although, much of the focus has been on the narrowing of the yield curve, if US 30-year yield were to materially close below 2.64%, not only would it shift US 30-year futures prices back towards the highs seen back in September & June, but it would most likely further flatten the yield curve, which could usher-in additional bout of risk aversion that would likely further influence the entire global financial market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.