BAR Weekly: The Market Underestimates A No Trade Deal

Dec. 11, 2019 12:46 PM ETGraniteShares Gold Trust (BAR)2 Comments3 Likes
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Summary

  • BAR remains pressured on the downside because investors continue to be overly optimistic about global economic growth and US-China trade relations.
  • But no US-China trade deal before the December 15 deadline could trigger a violent sell-off in risk assets, boosting haven demand and BAR.
  • Gold’s spec positioning improved slightly in the week to December 3, but ETF positioning deteriorated.
  • The long-term technical picture looks bullish.
  • Our year-end target for BAR is set at $16.00 per share.

Introduction

Welcome to Orchid's Gold Weekly report. We discuss gold prices through the lenses of the GraniteShares Gold Trust ETF (NYSEARCA:BAR).

BAR remains pressured on the downside because investors continue to be overly optimistic about global economic growth and US-China trade relations, which in turn hinders demand for safe-havens.

However, we believe that investor optimism is unlikely to last for too long as that a violent sell-off in risk assets could occur should a US-China trade deal fail to emerge before the December 15 deadline when a new round of US tariffs is due to kick in.

In this context, we believe that the risk-reward for BAR is skewed to the upside for the rest of the year and beyond. The long-term technical picture looks robust.

We maintain our year-end target at $16 per share for BAR.

Source: Trading View, Orchid Research

About BAR

BAR is directly impacted by the vagaries of gold spot prices because the Fund 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 (0.1749%), 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 0.1749% while IAU and GLD have an expense ratio of 0.25% and 0.40%, respectively.

Speculative positioning

Source: CFTC, Orchid Research

Speculators lifted their net long position in Comex gold by 59 tonnes over November 26-December 3. The Comex gold spot price rose 1.1% over the same period.

The net spec length in gold - at 904 tonnes as of December 3 - increased strongly by 98 tonnes from October 22 when it reached a low of 806 tonnes.

Gold's spec positioning is quite stretched on the long side when we normalize the net spec length, as illustrated below.

Source: CFTC, Orchid Research

While this suggests that speculative buying pressure is limited from here, gold's spec positioning could remain stretched on the long side in the near term should the macro backdrop for safe-havens become more favorable.

Implications for BAR: We contend that too long speculative positioning is not ideal because it means that buying pressure from hedge funds is constrained. Nevertheless, we emphasize that gold's spec positioning could remain stretched on the long side in near term in case of a positive macro. In this case, BAR would prove resilient.

Investment positioning

Source: Orchid Research

ETF investors liquidated 10 tonnes of gold last week, after purchasing 7 tonnes in the prior week.

Investors appear to be overly optimistic that a partial trade deal between the US and China will emerge before a new round of tariffs kicks in on December 15. This optimism is reflected in the resilience of US equities, which trade close to their all-time high. The US equity strength has also been reinforced by the robust US jobs report for November (reducing significantly the probability of a recession over the next quarter).

This excessive optimism leads us to suggest that the market is not prepared for a no trade deal. Put it differently, investors do not appear sufficiently hedged against a risk-off episode caused by a potential re-escalation of US-China trade tensions. We think that this too optimistic sentiment is unlikely to last for too long and that gold ETF flows are more likely to be positive than negative in the weeks ahead.

Implications for BAR: A resurgence of positive ETF flows into gold is likely to push gold spot prices higher, which in turn will lift the value of BAR.

Technical view (monthly)

Source: Trading View, Orchid Research

Although gold has traded sideways since September (due to heavy resistance at $1,550), the long-term uptrend in gold remains intact. The 20 and 50 month moving averages are upwardly inclined, and the 20 month moving average is above its 50 month moving average.

In addition, the monthly MACD has crossed positively since the start of the year and its current posture suggests that the uptrend is due to continue. In this context, we believe that the uptrend is well and alive, and any pullback will be bought.

Closing thoughts

BAR has been relatively weak since November, principally because investors are inclined to remain optimistic about global economic growth in 2020 and expect a de-escalation of US-China trade tensions.

This leads us to argue that the risk-reward is in favor of gold. Should a US-China trade deal fail to emerge, a violent risk-off phase is likely to ensue, which will boost safe-haven demand for gold, benefiting BAR.

The monthly technical chart shows us that the long-term uptrend is still intact.

Putting all together, we maintain our constructive outlook on BAR for the rest of the year and beyond.

Our year-end target for BAR is set at $16.00 per share.

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This article was written by

Orchid Research profile picture
5.6K Followers
Orchid Research focuses mostly on commodity and macro analysis, with a particular emphasis on the metals markets and China. We conduct research on supply and demand trends across commodities. We also analyse global macro dynamics and their reflexive interactions with the commodity complex. With 10+ years of experience in macro and commodity research, Orchid Research seeks not only to deliver unbiased views and accurate forecasts, but also to identify trade opportunities generating α.
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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.

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