Gold Weekly: Rally Set To Accelerate

by: Boris Mikanikrezai

The rally in gold prices has intensified since the start of December, in line with my conjectures.

Speculators lifted significantly their net spec length over November 27-December 4, the CFTC shows.

ETF investors remained on the sidelines last week, according to Fastmarkets.

The dovish turn operated by the Fed at the end of November should elicit monetary demand for gold, resulting in a strong finish to the year.

The worst could be behind us.



Welcome to my Gold Weekly.

In this report, I discuss mainly my views about the gold market through the World Gold Shares SPDR Gold Minishares Trust ETF (GLDM). GLDM is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault in the custody of HSBC bank.

To do so, I analyse the recent changes in speculative positions on the Comex (based on the CFTC) and ETF holdings (based on Fastmarkets' estimates) in a bid to draw some interpretations about investor and speculator behavior. Then, I discuss my global macro view and the implications for monetary demand for gold. I conclude the report by sharing my trading positioning.

Speculative positions on the Comex

The CFTC statistics are public and free. The CFTC publishes its Commitment of Traders report (COTR) every Friday, which covers data from the week ending the previous Tuesday. In this COTR, I analyze the speculative positioning, that is, the positions held by the speculative community, called "non-commercials" in the legacy COTR, which tracks data from 1986.

It is important to note that the changes in speculative positioning in the gold futures contracts do not involve physical flows because it is very uncommon for speculators to take delivery of physical on the futures contracts that they trade. Due to the use of leverage by speculators, the changes in speculative positions in gold futures contracts tend to be much greater than the changes in other components of gold demand like ETFs or jewelry.

As a result, the impact on gold spot prices tends to be relatively more important and volatile, which, in turn, affect the value of GLDM because the latter physically holds the metal in vaults in London and, therefore, have a direct exposure to spot gold prices.

Gold ETF positions

The data about gold ETF holdings are from Fastmarkets, an independent metals agency which tracks ETF holdings across the precious metals complex. Fastmarkets tracks on a daily basis a total of 21 gold ETFs, which represent the majority of total gold ETF holdings. The largest gold ETFs tracked by Fastmarkets are the SPDR® Gold Shares (GLD), whose holdings represent nearly 40% of total gold ETF holdings, and the iShares Gold Trust (IAU), whose holdings represent roughly 15% of total gold ETF holdings.


The rally in gold prices has accelerated since the start of December, with Comex gold up around 2%, mainly because the macro backdrop has turned notably friendlier, with the dollar and US real rates under downward pressure.

The more favorable macro for gold has resulted in a significant increase in monetary demand for the yellow metal, evident in significant speculative buying and a pick-up in ETF inflows.

The dovish turn operated by the Fed at the end of November is set to result in further downward pressure on the dollar and US real rates and therefore, boost further monetary demand for gold.

I continue to believe that gold will enjoy a strong finish to the year.

Speculative positioning

Source: CFTC

According to the latest Commitment of Traders report (COTR) provided by the CFTC, non-commercials lifted significantly their net long position in Comex gold, marking the largest pace since mid-October, in the week to December 4.

The net spec length increased by 147 tonnes, moving from 6 tonnes (0% of open interest) on November 27 to 152 tonnes (12% of open interest) on December 4.

The remarkable improvement in gold’s spec positioning was mainly driven by short-covering (96 tonnes) and further reinforced by long accumulation (51 tonnes).

  • Gross longs raised their exposure for the first time in four weeks.
  • Gross shorts covered their positions for a third straight week.

While speculative sentiment toward Comex gold has improved, the fact that short-covering has driven the increase in the net spec length reinforces my view that we are still in the initial phase of the speculative normalization process.

Consequently, I expect longs to take the baton and build positions at a more aggressive pace in the coming weeks. At 152 tonnes, the net spec length is still far below its historical average of 217 tonnes and a fortiori, its historical high of 983 tonnes (July 2016). My prima facie analysis therefore suggests that there is plenty of room for further increases in net long speculative positions in Comex gold.

Bottom line: The first phase of the process of speculative normalization has started, evident in short-covering. Henceforth, I expect fresh buying to drive the increase in the net spec length, which will correspond to the second phase of the normalization process. This should translate into significant speculative buying in favour of Comex gold, thereby exerting upward pressure on Comex gold spot prices and lifting the value of the World Gold Shares SPDR Gold Minishares Trust ETF (GLDM) .

Investment positioning

Source: Fastmarkets

ETF investors left their gold holdings broadly unchanged in the week to December 7, according to Fastmarkets.

Gold ETF holdings amounted to 2,065 tonnes as of December 7. Last week marked the end of steady inflows over the past few weeks. GLD enjoyed small inflows of 1.5 tonnes in the first week of December.

Given the improvement in the macro backdrop (weaker dollar, lower US real rates, higher risk aversion), I think that ETF inflows into gold could accelerate in the coming weeks. Clearly, 2018 marked the start of rocky waters for US equities, which could therefore lead investors to rebalance their portfolios toward a more defensive philosophy for next year (see: U.S. equities: Time To Be Cautious, December 7, 2018). This should result in stronger ETF demand for gold.

Bottom line: Investors become increasingly cognizant of late cycle concerns in the US economy after the notable de-rating in US equities this year. As such, I believe that investors will rebalance their portfolios and positioned themselves more defensively, resulting in stronger haven demand and thus stronger gold ETF inflows.

Trading positioning

To play a rally in gold prices, I propose the World Gold Shares SPDR Gold Minishares Trust ETF (GLDM).

Source: Seeking Alpha

GLDM’s technical indicators are bullish, evident in 1)the positive trading momentum, 2)GLDM above its rising 20 DMA, 3)the 20 DMA above its 200 DMA, and 4)last but not least, the fact that GLDM managed to reach a higher high.

All of this points to further upward pressure in the immediate term.

Bottom line: I expect GLDM to enjoy a strong finish to the year.

GLDM – World Gold Shares SPDR Gold Minishares Trust ETF - Review

GLDM is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault and custodied by HSBC Bank. The investment objective of the fund is to replicate the performance of the price of gold, less trust expenses (0.18%), according to GLDM's factsheet.

The physically-backed methodology prevents investors from getting hurt by the contango structure of the gold market, contrary to ETFs using futures contracts.

GLDM is:

Easily Accessible: listed on the NYSE Arca

Secure: The shares represent fractional, undivided interests in the Trust, the sole assets of which are physical gold bullion and, from time to time, cash.

Cost Effective: The ETF allows investors to buy gold at a much lower cost than if they had to purchase, store and insure their physical gold by themselves.

GLDM offers the lowest expense ratio of just 0.18 among its peers. GLD, IAU, and BAR have an expense ratio of 0.50%, 0.25%, and 0,20%, respectively.

GLDM’s average spread (over the past 60 trading days) is 0.08%, which is a touch lower than that of its competitor IAU, at 0.09%.

GLDM's average daily volume (over the past 45 trading days) is ~$4.5 million, which is much lower than that of IAU, at ~$126 million.

As of December 10 2018, GLDM’s assets under management (AUM) totalled $309 million, with 25 million shares. GLDM’s gold holdings were at 7.2 tonnes. In contrast, IAU’s assets under management amounted to $10.7 billion, with 911 million shares. IAU’s gold holdings were at around 271 tonnes.

Disclosure: I am/we are long BAR. 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.