Gold COT: Robust Demand On Weaker Dollar

Gold is showing some very good strength at this time, as the weaker dollar, combined with negative interest rates, and in some instances, NEGATIVE REAL RATES, has made the opportunity cost in holding the metal practically non-existent. Throw in the continued uncertainty over global equity market valuations, and gold demand continues to remain strong. As noted previously however,the recent lackluster interest in the SPDR Gold Shares ETF (NYSE:GLD) is on my radar screen.

While gold is at its highest level on the charts since January 2015, the reported holdings in GLD are actually below their peak this year, during the last week of March. At that time there were 823 tons reported in GLD; this past Friday there were 804, a difference of 19 tons.

Total tonnage in GLD does however remain 162 tons higher than at the start of the year. Thus, while the recent poor showing in the reported holdings of GLD is noteworthy, overall we have not as yet seen anything that would suggest a sharp change in sentiment towards gold among Western-based investors.

I was disappointed to see a mere 1.6 ton increase in reported gold holdings since Wednesday, especially when one considers the dovish FOMC statement and the Bank of Japan policy announcement that sent the yen soaring and the dollar sharply lower. I would have thought we would see at least an 8-10 ton increase. Maybe we will see that next week. Then again, maybe we won't. Who knows?

Here is an updated chart noting the gold price and looking at the yield curve as illustrated by mapping the spread between the U.S. 10-Year Treasury and the 2-Year Treasury bond.

There is still nothing in this spread that would indicate the interest rate markets are the least bit concerned about inflationary pressures building in the US economy. While the spread has steepened from its tightest levels seen in early March of this year, it remains well below where it was a year ago.

I keep referring to this spread because I keep trying to ascertain whether this commodity buying binge has anything fundamental behind it or if the entire thing is merely a function of the weaker dollar generating hot money flows into a beaten down sector in the hopes of picking up some fast money. Until I see evidence that this spread is suggesting more rapid growth, I will be inclined to believe that while this recent push higher across so many metals markets has been impressive, the fundamental underpinnings needed to sustain these higher prices is missing. We’ll just have to keep watching to see how things unfold.

Back to the COT specifics…

Through Tuesday of this past week, there was little in the way of significant changes to the positioning of the players.

There was a slight reduction in the net long position of the hedge funds and a slight reduction in the net short positions of the Commercials and Swap Dealers. It should be noted however, that all of the significant events that impacted the gold price in such a positive manner happened AFTER the Tuesday cutoff date. I am of course referring to the FOMC and the BOJ.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

In looking at the hedge fund position alone, you can see that it remains elevated but is below previous record highs.

Here is a chart showing the hedge fund OUTRIGHT positions and the gold price.

Note that compared to previous high points in the outright long position by this group of traders, there remain more skeptics as their outright short positions still remain larger than at other peaks in the long position.

There is therefore additional fuel for further gains should technical chart levels get tripped to the upside that would force these short positions to be covered.

Another look, based on percentages of combined large spec longs versus combined commercials and swap dealer shorts is rather interesting:

While the combined Commercial and Swap Dealer short position remains well below its previous peak above 60% back in 2011, the combined large spec long position is at an all time record high.

Some of this is due to the fact that a fair number of spreads were taken off this past week and that drops the overall open interest total, making the naked futures and options positions take on a greater weighting when measured in this manner.

While I am alarmed by what I see in silver, the recent COT report for gold does not give me any cause for concern. At least not yet.

In taking a look at the intermediate term or weekly chart, gold has put in the highest WEEKLY CLOSE since the last week of January 2015.

As you can see, over the last 3 months or so, gold has been moving sideways, just below $1300 and above roughly $1220. A weekly close above the psychologically significant $1300 level would allow this market to have a real shot at getting to $1340-$1350.

Above that and you have to put $1400 into play.

As long as the dollar remains weak, gold will garner buying support. It will however need some catalyst to send hot money flows really flooding into it.

In the greater scheme of things, gold entered into a bear market when it lost weekly chart support near $1525 in 2013. It had since fallen as low as $1050 (round number) before finding a solid bottom and recovering in price.

It has since recovered HALF OF THOSE LOSSES by moving above $1287.50, the halfway point between those two numbers. While impressive, it has a long way yet to go to make it back to $1520.

Maybe it will, maybe it won’t. The truth is no one—including the gold perma bull cult leaders—has any idea where price is headed in this market. Before it moves to the price that some of them are already back announcing once again (these people simply never stop with their “to the moon” predictions) let’s first see if it can manage to get back above $1525, and then we can talk about $1800. Until then, all such wild claims are simply that, wild claims by those who have a vested financial interest in promoting all things gold.

I have said it before and will say so again: you own gold for protection/insurance against monetary disorder and in times of economic uncertainty. It provides peace of mind. One does not cheer on the burning down of their own home in order to collect on the insurance.

That is the reason I still cannot stomach so many of these gold cult members who seem to not understand that when they are cheering on predictions of $5000, $50,000, etc. ,they are cheering on the ruin of everything around them. There is something seriously wrong with people who have that sort of mindset. It is almost pathological when one’s entire focus of life is the latest gold price quote.

Personally, I would love nothing better than to be able to completely ignore the price of gold. That would entail a stable, sound currency, a government that runs a balanced budget, a responsible Federal Reserve that has not sent interest rate levels so low that no senior citizen can possibly hope to live off of their life’s savings, a stock market that is priced on sound valuations and is moving higher not because of gargantuan sums of cheap money that has been conjured into existence but is instead moving higher because the underlying economy is sound, with reasonable and not oppressive government regulation and sound fiscal policy. If that were the case—and sadly it is not—we could safely ignore gold and let the gold cult have their closed meetings and preach to themselves. Wouldn’t that be nice?

Sadly, as Solomon warned us so many years ago: “There is nothing new under the sun”.

The world of gold will always be infested with hucksters, quacks, and charlatans that prey on the unsuspecting or the naive. As long as they can sell fear, and fear sells well, they will be among us.
That will never change.

That is the real tragedy here – because gold indeed has a role to play in our portfolios. Many who might otherwise consider owning it, do not, because they have been so badly burned by these quacks in the past that they want nothing to do with it, even when they should own some for peace of mind. That is the true legacy that so many of the gold hucksters have left in their wake of ruin and misery – not that they helped save some from ruin but that they directly led to the ruin of so many.

Written By: Dan Norcini