FUNDS - Gold & silver - COTR - Speculative profit-taking continues for longer

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Boris Mikanikrezaiboris.mikanikrezai@fastmarkets.comMetals Analyst+44 (0) 20 7337 2151

London 05/12/2016 - Key notes:

  • The net long fund position (NLFP) dropped in both gold and silver for a third straight week over November 22-29 on a negative macro backdrop.
  • We believe that the spec long positioning in gold and silver will continue to be unwound until the FOMC meeting on December 13-14.
  • The impact on silver prices should be more pronounced than that on gold. So being long gold/short silver could be an interesting trading idea over the 1-3 months.


Gold spec positioning

The NLFP in gold dropped for a third straight week over November 22-29, the latest CFTC statistics show. It now stands at 151,570 contracts, down 15,515 contracts or 9% on the previous week and at its lowest since late March.

Open interest moved sharply lower by 12% lower over the reporting period while Comex gold weakened by 0.5%. The combination of lower open interest and lower prices does not offer a clear market configuration.

 

The fall in the NLFP was mainly driven by long liquidation of 11,915 contracts and further reinforced by short accumulation of 3,600 contracts.

The extreme speculative bullishness, which reached is climax this summer, has corrected significantly since November, through a sharp fall in the gross long leg (black line). On the other hand, the gross short leg has remained fairly stable so far this year, suggesting a lack of conviction from speculators to meaningfully turn bearish on gold.

Because the NLFP remains at a very high level compared with its level from the start of the year (26,560 contracts as of January 5), we think there is still plenty of room for long liquidation in coming weeks and months. At the same time, we cannot exclude bouts of tactical fresh buying provided that the macro outlook proves more supportive of gold and other precious metals.

Looking ahead, we think that the current wave of long liquidation will continue until the December 13-14 FOMC meeting. Once the Fed raises rates, an outcome for which we attribute a probability of 95%, in line with market consensus, a wave of risk aversion is likely to ensue, which in turn could prompt speculators to re-engage in gold.


Silver spec positioning

The NLFP in silver fell for a third straight week over November 22-29. It now stands at 50,040 contracts, down 1,127 contracts or 2% from the previous week and down 39% from its 2016 peak late in July.

Open interest tumbled 8% over the reporting period while Comex silver was broadly flat (-0.1%). This does not provide a clear market configuration.

 

The fall in the NLFP continued to be driven by a broad-based deleveraging – longs cut 2,350 contracts and shorts closed out 1,223 contracts. Similarly to gold, speculators continued to unwind their net long positioning over the reporting period because of negative macro forces at play, most notably a firmer dollar, higher US real rates, and stronger US equities.

While speculators reduced their long exposure to silver to a lesser extent than in gold because silver tends to perform slightly better in a risk-on environment, the impact on prices was relatively much stronger on silver. This supports our expectation that silver should underperform gold in the coming weeks and months.

Looking ahead, we expect the NLFP to move about 50% lower toward its long-term average of roughly 32,000 contracts, essentially via long liquidation as we recognise that the gross short leg is at a fairly low level.





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