Following the release of the Federal Open Market Committee (FOMC) minutes
last week, gold and silver have come alive, the gold price rising from a low
of $1147 on 18th March to $1200 this morning and silver from $15.46 to
$17.00, 4% and 10% increases respectively.
The Commodity Futures trading Commission's (CFTC)Commitment of Traders
Report released last Friday conveniently shows the positions of trading
categories the night before the FOMC minutes were released. In gold, the
Managed Money category sold down their positions to the lowest net long
position since December 2013. This is shown in the chart below, with the
dotted line representing the average net long position since 2006.
This represents a dramatic turnaround in positions, and it has permitted
the Swaps (mostly bullion banks) category to reduce its net short position
substantially, shown in the next chart.
This confirms that the Managed Money category, consisting mostly of hedge
funds, was badly wrong-footed ahead of the FOMC release, being very short
indeed. In other words, there has been a significant bear squeeze
subsequently which has driven the gold price sharply higher.
A simple bear squeeze should be accompanied by a decline in Open Interest,
because a bear squeeze forces wrong-footed traders to close their loss-making
positions. However, Open Interest has been increasing, which it turns out is
entirely due to an increase in spreads1. Since Wednesday, Open Interest has
declined sharply, which suggests that spread positions have been closed as
the April contract runs off the board. This is shown in the next chart.
The presence of spreads, which are neither bullish nor bearish, negates
the hope that the recent increase in Open Interest is due to genuine demand.
Instead, we must conclude that dollar weakness after a period of significant
strength has much to do with the rise. Oil prices have rallied strongly as
well, having been oversold, confirming that markets so far appear to be only
correcting the moves of the last eight weeks.
However, there are fundamental reasons for a more bullish stance for gold,
not least the dawning realisation that the FOMC minutes from last week
effectively put off interest rate increases indefinitely. Whatever else is a
threat to the world's financial credibility, and you could make a very long
list of those, the Fed's admission that for the foreseeable future there is
no exit from continuing monetary inflation fully justifies a more positive
trend for precious metal prices.
The Shanghai Gold Exchange delivered 53.47 tonnes into public hands last
week, making a total of 561 tonnes so far this year, a slight increase on
last year.
1 Spreads are matching long and short positions designed to profit from
price differentials after financing between different maturities
Next week
Monday
UK: BoE Mortgage Approvals, Net Consumer Credit, Secured Lending, M4 Money
Supply.
Eurozone: Business Climate Index, Economic Sentiment, Consumer Sentiment,
Industrial Sentiment.
US: Core PCE Price Index, Personal Income, Personal Spending, Pending Home
Sales.
Tuesday
Japan: Construction Orders, Housing Starts.
UK: Current Account, GDP (3rd Est.), Index of Services.
Eurozone: Flash HCIP, Unemployment.
US: S&P Case-Shiller Home Price, Chicago PMI, Consumer Confidence.
Japan: Tankan Survey.
Wednesday
Eurozone: Manufacturing PMI.
US: ADP Employment Survey, Manufacturing PMI, Construction Spending, ISM
Manufacturing.
Thursday
UK: CIPS/Market Construction Survey.
US: Initial Claims, Trade Balance, Factory Orders.
Friday
US: Non-farm Payrolls, Unemployment.
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