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A Gold Rally is not far Away
Nov. 25, 2015 by: Boris Mikanikrezai
Summary
Money managers are now net short gold, reflecting an extremely bearish sentiment.
ETF investors continued to sell the precious metal for a third straight week, albeit at a slower pace.
Although the macro environment is negative for gold, sentiment is so weak that a reversal is likely.
Net speculative positions on the COMEX as well as ETF holdings in so far as the historical economic behavior of gold prices suggests that over a short-term horizon (<3 months), gold prices are largely influenced by changes in the forward fundamentals, reflected in changes in net spec length and ETF holdings.
Speculative positioning
 
Source: CFTC.
Gold. According to the latest Commitment of Traders provided by the CFTC, money managers, viewed as a relevant proxy for speculators, became net short gold in the week ending November 17, while spot gold prices fell by almost 2 percent over the period covered by the data.
The net speculative length fell from a net long position of 16,869 contracts as of November 10 to a net short position of 13,923 contracts as of November 17. In other words, the net spec length dropped 30,792 contracts from last week, the fourth consecutive weekly decrease. Taking a closer look, the fall in the net spec length was largely driven by a build-up of shorts (+29,422 contracts, the largest weekly increase since August 11) and was reinforced by a tepid liquidation of longs (-1,370 contracts, the fourth weekly decline in a row).
The net spec length is now in a negative territory for the first time since August 11 and is at its lowest level since July 28. It is important to note, in our view that the net spec length is at a very low level by historical standards. Indeed, except during the summer of 2015 when money managers were net short gold for about three weeks, money managers have always been net long gold since the CFTC started to publish its statistics back in 2006.
With the net spec length down 116 percent on the year and below its 2015 average (49,430 contracts) and long-term average (109,492 contracts), we argue that the spec positioning in the gold market has become overstretched to the short-side, and as such, a bout of short-covering could emerge in the very short-term.
Last week I mentioned that money managers reached an extremely bearish positioning so the sell-off in gold prices could run out of steam. Although gold prices continued to reach new 2015 lows last week, we note that the market has been struggling to push sustainably lower, suggesting a waning conviction in the short side. This confirms that gold prices are close to enter a bottoming-out process.
Looking ahead, I will closely monitor the current week's market action and if gold prices should manage to remain above their last week's low, this would suggest, in my view, that gold prices have already bottomed out, and I would jump in the long side accordingly although the stop loss would need to be carefully chosen due to a possible spike in volatility when prices are near a trough (or a peak).
Investment positioning
Source: FastMarkets.
Gold. ETF investors sold gold for third week in a row as of November 20, albeit at a slower pace than the prior two weeks.
Gold ETF holdings fell about 5 tonnes between November 13 and November 20, which we attribute to some selling from short-term investors ahead of the December FOMC meeting where the Fed is set to raise the federal funds rate for the first time in almost a decade. Indeed, although US macro data were not particularly encouraging such as industrial production for October (down 0.2 percent from September) or housing starts (at 1.06 million in October, down from 1.19 million in September), the release of the October FOMC minutes on November 18 proved to me more hawkish than market participants had previously envisaged. According to the minutes, most FOMC market participants anticipated that the conditions for starting the policy normalisation process could be met 'by the time of the next meeting". Against this backdrop, market participants revised upwards their expectations for the timing of the liftoff. The 30-day fed-funds futures are currently pricing in a 74-percent probability for a December liftoff, compared with 70 percent before the release of the minutes. ETF investors sold gold accordingly the following day, about 3.38 tonnes or 68 percent of the weekly amount sold.
However, we believe it is worth mentioning that the pace of the decline in gold ETF holdings has slowed, which suggests that those holdings are increasingly held by stronger hands. In spite a downward trend in ETF holdings since late 2012, the pace of outflows has gradually declined.
Amounting to 1,518 tonnes as of November 20, total gold ETF holdings (tracked by FastMarkets) were down 5 tonnes from last week and 33 tonnes from the start of November. They are therefore on track to record the first monthly outflow in 4 months as investors were net buyers of 12 tonnes of gold in October, 2 tonnes in September and 10 tonnes in August. ETF investors are currently net sellers of 77 tonnes of gold on the year, due to strong outflows between March and July.
Looking ahead, we believe that the current commodity-unfriendly macro environment could push gold ETF holdings below their year-to-date low of 1,517 tonnes seen early in August. However, we do not expect the pace of ETF selling to accelerate nor these holdings to fall sharply below the 1,500-tonne level in so far as those physical holdings are held by "strong hands" investors with a long-term philosophy.
From a technical perspective, it is clear to me that the market is deeply oversold in the near-term and as such, a rally is necessary to alleviate deeply oversold conditions. Further, GLD is sitting near a solid support, the 98-100 level, which could thereby induce some short-covering from this price level.
From a fundamental perspective, sentiment is currently so weak that a reversal in gold prices appear to me very likely at this crucial juncture.
(end of Article)
Gold Short Term
From a short term perspective, we have the Thanksgiving Holiday in USA upon us and markets this is a time when we can see very little change in price for the remainder of the week. But it is also a point where the control boyz can move the market (because of low volume participation) in a sharp manner in either direction if they so choose. In the past we have seen it all. We have seen 50 dollar rallies on the Friday after Thanksgiving, we have seen big sell-offs and we have seen this holiday produce almost no price movement. Thus it is impossible to gauge exactly what will transpire this time.
While the above article strongly argues a rally is fast coming, there is nothing to say that it can't take another week or two to fully develop.
The other factor that is key to remember is the FOMC meeting coming up in December. The FED is quickly running out of reliability as they have cancelled a raise in rates over and over. With the global economic situation imploding, they are in quite the pickle at the moment. In fact they even called an emergency meeting for last Monday. Here is what was listed on the Fed Website in regards to that meeting; My thanks to Greg L. for the notification.
Advanced Notice of a Meeting under Expedited Procedures
It is anticipated that the closed meeting of the Board of Governors of the Federal Reserve System at 11:30 AM on Monday, November 23, 2015, will be held under expedited procedures, as set forth in section 26lb.7 of the Board's Rules Regarding Public Observation of Meetings, at the Board's offices at 20th Street and C Streets, N.W., Washington, D.C. The following items of official Board business are tentatively scheduled to be considered at that meeting.
Meeting Date: Monday, November 23, 2015
Matter(s) Considered
1. Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.
A final announcement of matters considered under expedited procedures will be available in the Board's Freedom of Information and Public Affairs Offices and on the Board's Web site following the closed meeting.
(end of statement)
Since that meeting, there has been no further announcements. Thus we are not sure if they have decided not to raise rates or whether they push forward.
As far as the short term gold chart, prices have continued to vacillate in a very tight range over the past week between 1067 and 1084. We need a close above 1085 to neutralize the situation and then a close above 1095 -1102 in order to favor higher prices towards either 1112-1115 and or 1122-1127. As long as we remain below 1085 the potential to move lower can continue.
Gold Short term Cycles
The short term gold cycles are also reflecting the uncertainty in the market. Today, we have two charts to present.
The first chart is suggesting that gold remains very weak and that a final selloff into and around Dec 7th is going to take place. If this scenario develops, we would look for the low of the year to be established then and a reaction rally to take place going into the Jan-Feb time frame. While this looks to be the preferred chart rotation of the short term cycles, let's look at one more chart.
This alternate chart does allow for a low to be made here and launch a rally from this point. One of the reasons we are less inclined to believe this chart is correct is that Martin Armstrong has a potential bear market low reading during the week of December 7th. That doesn't mean that IT WILL happen that way, but it does make us hesitate here to say the chart below has a better chance to be correct. The one thing that this chart does emit is a BLUE cycle low, which is what BULL markets produce when they are rallying. In summary, the cycles are reflecting what the current market conditions are, and that is uncertainty. With that said, we should bear in mind the big COT changes that have occurred in the past month as it is IMPLYING that a gold RALLY is coming. It could take a couple more weeks to develop, but we should be aware it can begin at any time. A close above 1085 will be the first thing to watch for and then a close above 1095 would be the 2nd. If we close above 1095, odds favor we are moving higher into and around the Dec 7th time frame.
In conclusion, there is no confirmation yet that gold can't go lower, but there are many signs that the bear market is in its final chapter from the 2011 high.
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