London 20/03/2017 - Key notes:
- The net long fund position (NLFP) dropped in gold and silver over the reporting period (March 7-14) amid a stronger dollar and higher US real rates.
- Risk aversion may emerge in the coming days/week, as a result of deep complacency across the financial markets. In this context, we expect speculators to prefer gold to silver.
- But because a reflationary environment should prevail this year, speculative buying should prove much more modest than last year.
Gold spec positioning
The NLFP in gold tumbled for a second straight week over March 7-14, the latest CFTC statistics show. As of March 14, it stood at 106,038 contracts, down 27,647 contracts or 21% on the previous week but still little up 7,695 contracts or 8% in the year to date.
Open interest dropped by 2% over the reporting period while Comex gold weakened by 1.3%. The combination of weaker open interest and lower prices is not a clear market set-up.
The fall in the NLFP over the reporting period was mainly driven by long liquidation of 19,654 contracts and reinforced further by short accumulation of 7,993 contracts.
The significant deterioration in speculative positioning was associated with negative macro forces for the complex including a stronger dollar, higher US real rates, and robust global risk appetite on the back of robust US macro data (i.e. US jobs report) ahead of the Fed’s meeting.
Despite the intense wave of speculative selling, gold prices remained relatively resilient, suggesting the presence of offsetting buying pressure elsewhere in the market. The net spec positioning toward gold is now neutral after being overstretched on the long side earlier this week. This is overall healthy.
Looking ahead, we think that spec may re-engage on the long side similar to what happened during the previous Fed rate increase in December 2016. This should support prices in coming days/weeks, we think.
Silver spec positioning
The NLFP in silver dropped for a second straight week over March 7-14. As of March 14, it stood at 82,878 contracts, down 10,575 contracts or 11% from the previous week but still up 23,967 contracts or 41% so far this year.
Open interest dropped by 3% over the reporting period during which Comex silver slumped by 3.3%. The combination of lower open interest and lower prices does not offer a clear market set-up.
The fall in the NLFP was essentially driven by long liquidation of 10,762 contracts that was marginally offset by short covering of 187 contracts.
Considering the negative macro forces against the precious metals complex over the reporting period and the fall in gold’s spec positioning, we think that the deterioration in silver’s speculative positioning is not surprising.
While speculators continue to prefer silver to gold so far this year as a result of the continued resilience in risk appetite, the potential for speculative selling in silver is larger than that in gold. This puts silver at risk in case of a downswing in spec sentiment, triggered by fresh risk aversion.
Looking ahead, we think that speculative positioning in silver may deteriorate given our view that the financial markets may be hit by resurgence of risk aversion over the coming days/weeks as a result of the deep complacency in the markets.