Gold (BAR) Weekly: A Little Bit More Downside In Sight

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About: GraniteShares Gold Trust (BAR)
by: Orchid Research
Summary

BAR has come under pressure at the start of September, due to a sharp rebound in US real rates.

Gold’s spec positioning (as of September 3) is still stretched on the long side.

ETF investors bought gold in the first trading week of September, marking a 6th consecutive week of inflows.

While BAR is a “buy” over the short term and beyond, more downside is possible over the immediate term.

For September, we forecast a trading range of $14.20-$16.30 per share for BAR.

Introduction

Welcome to Orchid's Gold Weekly report. We discuss gold prices through the lenses of the GraniteShares Gold Trust ETF (BAR), which replicates the performance of gold prices by holding physically gold bars in a London vault in the custody of ICBC Standard Bank.

BAR has dropped a little further (-1.6%) since our latest weekly update, which has been driven by a notable rebound in US real rates, on less investor pessimism over the US economic outlook after the recent de-escalation of US-China trade frictions.

The decline in BAR is not a surprise because spec positioning in gold was overstretched on the long side, which amplified the magnitude of the selling pressure following the run-up in US real rates.

BAR is presently in the middle of our trading range ($14.20 - $16.30) envisaged for September, prompting us to stay on the sidelines.

While we continue to prefer silver to express our medium/long-term view on the precious metals complex, we would await more downside in BAR before re-asserting upside exposure.

Source: Trading View, Orchid Research

About BAR

BAR is directly impacted by the vagaries of gold spot prices because the Funds physically holds gold bars in a London vault and custodied by ICBC Standard Bank. The investment objective of the Fund is to replicate the performance of the price of gold, less trust expenses (0.20%), according to BAR's prospectus.

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

Also, the structure of a grantor trust protects investors since trustees cannot lend the gold bars.

BAR provides exposure which is identical to established competitors like GLD and IAU, which are nevertheless much more costly to hold over a long period of time. Indeed, BAR offers an expense ratio of just 0.20% while IAU and GLD have an expense ratio of 0.25% and 0.50%, respectively.

Speculative positioning

Source: CFTC, Orchid Research

Speculators lifted on the margin their net long exposure to Comex gold in the week to September 3.

The net spec length rose only by the equivalent of 12 tonnes or 1% of open interest over August 27-September 3.

Since the start of the year, however, it has rose markedly by the equivalent of 641 tonnes or 32% of open interest.

The net spec length – at 925 tonnes or 47% of open interest as of September 3 – is now very close to its historical high of 983 tonnes established on July 5, 2016.

This stretched positioning makes gold vulnerable to a potentially large sell-off in case of a de-grossing of this heavy-long positioning among the speculative community.

Implications for BAR: The stretched spec positioning reduces the room for additional spec buying in the short term. This does not bode well for gold prices and thus BAR.

Investment positioning

Source: Orchid Research

ETF investors were net buyers of gold in the week to September 6, for a 6th week in a row.

ETF investors added 15 tonnes to their gold reserves over in the first trading week of September, after buying 96 tonnes last month – the largest monthly net inflow since June 2016.

Source: Orchid Research

Investment demand for gold makes total sense, in our view, in the current macro backdrop characterized by 1)late-cycle dynamics, 2)higher uncertainty about the global economic outlook, 3)a shift toward more and more policy easing, and 4)a gradual decrease in long-term real interest rates. When you have all these ingredients in the macro picture, gold is the best asset you can hold.

Implications for BAR: Increasing demand for safe-haven should continue to grow in the coming months, which should translate into further inflows into gold ETFs, stronger gold prices, and thus a stronger BAR.

Closing thoughts

Although BAR has decline somewhat since the start of September, we are of the view that gold’s spec positioning is still stretched on the long side, suggesting that more downside is potentially possible in the immediate term.

We believe any weakness in BAR in the immediate term (~1 week) represents a buying opportunity in the short (~1 month) to medium (~6 month) term.

With BAR in the middle of our trading range forecast for September at $14.20-$16.30 per share, we remain patient and stand ready to reassert upside exposure should BAR fall a little further.

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.

Additional disclosure: Our research has not been prepared in accordance with the legal requirements designed to promote the independence of investment research. Therefore, this material cannot be considered as investment research, a research recommendation, nor a personal recommendation or advice, for regulatory purposes.