London 09/01/2017 - Key notes:
- The net long fund position (NLFP) dropped in gold but rose in silver over the December 27-January 3 reporting period. We believe fresh buying in gold and silver is likely in the first quarter of 2017 due to increased risk aversion.
- But because the dollar and US real rates should move higher in 2017 thanks to Trump economics, any bout of speculative buying interest should prove fleeting.
Gold spec positioning
The NLFP in gold dropped for the eighth straight week over December 27-January 3, the latest CFTC statistics show. It now stands at 96,550 contracts, down 1,793 contracts or 2% on the previous week and at its lowest since late in February 2016.
Open interest rose about 6% over the reporting period while Comex gold climbed 1.6%. The combination of stronger open interest and higher prices is a bullish market set-up and suggests gold could perform well in the weeks ahead.
The fall in the NLFP was driven by a build-up of shorts of 4,110 contracts that was partly offset by a pick-up in longs of 4,110 contracts.
On the one hand, we are surprised by the deterioration in the speculative positioning considering the friendlier macro environment for the precious metals. Indeed, the reporting period was marked by a notable fall in US real rates and consolidation in the dollar. Still, shorts (red line) were confident about lifting their exposure while longs (black line) appeared more conservative.
On the other hand, it is encouraging that gold prices managed to push higher despite the fall in the net speculative length because it suggests the presence of strong underlying buying pressure elsewhere in the gold market.
Looking ahead, we see an inevitable return to risk aversion at some point in the first quarter after investors became too complacent. In this context, we think buying interest in gold will re-emerge given an interesting reward/risk profile after its sharp price fall in the fourth quarter of 2016. But we still feel the coming wave of speculative buying for gold will not last beyond the second half of 2017.
Silver spec positioning
The NLFP in silver rose for the first time in three weeks over December 20-27. It now stands at 61,291 contracts, up 2,380 contracts or 4% from the previous week but down 36% from its 2016 peak late in July.
Open interest was stable over the reporting period while Comex silver climbed 2%. The combination of stable open interest and higher prices does not offer a clear market configuration.
The improvement in speculative positioning was driven by long accumulation of 2,491 contracts while shorts raised their exposure by 111 contracts.
As noted previously, the macro environment was supportive of precious metals, prompting speculators to lift their long positioning in silver. At the same time, the financial markets remained in risk-on mode, judging by the steady gains across equities. This partly explains why speculative sentiment was relatively more favourable toward silver.
Looking ahead, we think the net spec length will increase steadily throughout the first quarter given our view that risk aversion should pick up in near term. Similarly to gold, however, we expect speculative selling to resume in the second half of the year, which should put silver prices under pressure over the whole of 2017.
(Editing by Mark Shaw)