London 26/09/2016 - Key notes:
- The NLFP in gold dropped over September 13-20 while the NLFP in silver increased slightly thanks to stronger risk appetite.
- We expect the NLFP in gold and silver to increase a little in the coming weeks but we see an elevated probability of a reversal in sentiment in the fourth quarter.
The net long fund position (NLFP) in gold dropped for a second consecutive time in the week to September 20, the latest CFTC statistics show. It stands at 256,179 contracts, down 29,234 contracts or 10 percent on the previous week.
Open interest rose to 558,791 contracts from 572,002 contracts over the reporting period while gold prices were about unchanged, edging 0.34 percent lower.
The deterioration in speculative positioning was largely driven by long liquidation of 25,450 contracts and was reinforced by an increase of 3,784 shorts.
Despite a slight fall in US real interest rates (which tends to boost net long spec positioning), the combination of a stronger dollar, lower volatility and a weaker oil price was enough to prompt non-commercials to shorten their NLFP. The fall in gross longs was a sign that non-commercials decided to reduce risk, probably because of heightened uncertainty stemming from the September 21 FOMC meeting
But in line with our expectations, the Fed remained on hold and adopted a slightly more dovish stance than market consensus by revising lower its macro forecasts. This probably prompted non-commercials to rebuild their long positioning, which is consistent with recent strong upward pressure in gold.
Looking ahead, we think the NLFP may continue to rise due to a friendlier post-Fed macro environment. Still, speculative buying pressure should be somewhat limited given that the NLFP is already at a very high level and close to its all-time high of 315,963 contracts from July this year. So we still see the risk of a reversal in spec sentiment as elevated in the fourth quarter.
The NLFP in silver increased slightly for a third time in the past four weeks in the week to September 20. It now stands at 82,635 contracts, up 1,067 contracts or one percent from the previous week.
Open interest edged down to 193,501 contracts from 193,953 contracts over the reporting period while the silver price climbed 1.85 percent.
The slight improvement in spec positioning was driven by short-covering of 1,292 contracts that was partly offset by long liquidation of 225 contracts.
The notable fall in global risk sentiment, as the decline in the VIX shows, probably prompted non-commercials to reduce their gross shorts because silver, although sometimes viewed as an alternative safe haven, tends to perform well in a risk-on environment. But investors are keen on silver, resulting in lack of conviction to short. The conclusion of the FOMC meeting probably triggered strong spec buying, judging by the subsequent rally in silver.
Similarly to gold, the NLFP remains at an elevated level and is just 12 percent below its all-time high of 96,077 contracts from late in July. Still, we can see that longs (green) have failed in recent weeks to expand their positions - perhaps buying pressure in easing. At the same time, shorts (red line) have been in a quiet uptrend, suggesting a willingness to rebuild some short exposure. This is bearish for silver.
Looking ahead, we believe the NLFP may rise a little in coming weeks thanks to a patient Fed and its flattening impact on the yield curve. But we do not expect this to last; once the dollar and US real rates rebound, speculative selling is likely to follow. A further deterioration in the gross long leg would reinforce our thesis.
(Editing by Mark Shaw)