“the danger is bigger that we see a major fall quite than an additional rally greater…”
by David Brady by way of Sprott Cash Information
Open curiosity in Gold futures on the COMEX bottomed at 430okay contracts on April 30. They’ve since risen to 526okay on June 18. That’s a rise of 96okay contracts.
On the identical time, the Swaps (aka the “Banks”) have elevated their internet brief place from 37okay to 122okay, or 85okay contracts. Which means a full 88% of the rise in open curiosity has gone straight to the Banks’ internet brief place.
Open curiosity on Tuesday, June 25, closed at 578okay, a rise of 52okay in only one week. An enormous transfer. Utilizing 88% as a information for the corresponding improve within the Banks’ internet brief place, we get a rise of 46okay contracts to 168okay contracts. Whereas that is simply an estimate (it could possibly be greater or decrease), this could imply Banks have the most important internet brief place since September 2016. It could even be simply 23okay contracts shy of their file internet brief place in July 2016, when Gold peaked at 1377 and subsequently fell 253, or 18%, to 1124 in simply the following 5 months.
On the identical time, utilizing an identical methodology, the Funds have elevated their internet lengthy place to 232okay contracts. This could be their greatest lengthy place for the reason that peak in September 2017 at 1362 and simply 41okay contracts under their file lengthy place in July 2016.
Whereas these are estimates and we received’t have the definitive information till tomorrow, they make sense in mild of the rise in worth from 1351 on June 18 to their peak of 1443 on June 25. Funds are likely to chase the worth greater by including longs, one thing they’ve performed the entire means up from the low of 1267 on Could 2. Banks, after all, take the opposite and add shorts on the identical time.
Might we be about to see a repeat of what occurred submit the summer time peak of 2016, when Funds have been file lengthy and Banks have been file brief? Probably. The Banks are all about making a fast and sizeable revenue, and they want nothing extra to squeeze out all the weak and late longs to this rally.
This weekend we have now the G20 and commerce negotiations between Trump and Xi. Whereas we don’t know what the result goes to be, there’s a excessive danger that the negotiations fail but once more and new tariffs are imposed on $300bln, or the vast majority of China’s exports to the USA. Ought to this happen, the Chinese language might reply by permitting USD/CNY to rise above the essential 7 threshold relative to the greenback. Until there’s a commensurate rise in XAU/CNY, Gold in greenback phrases would fall. Given the dimensions of Funds’ longs and Banks’ shorts, this could possibly be sizeable.
Alternatively, if we’re stunned by some type of deal, nonetheless insubstantial, and the inventory market rallies to new highs, expectations for price cuts from the Fed could subside, inflicting Gold to fall (and given the relative positioning, fall laborious).
Moreover, subsequent week is the week of the July four th vacation within the U.S., when many merchants are out of the workplace on trip, making it a extra illiquid, low quantity week. To the extent we get any type of momentum on the promote facet and longs are pressured to cowl, this might exacerbate the velocity and dimension of any decline in worth. In fact, the identical could possibly be mentioned on the upside, however given the positioning of the Funds relative to the Banks, historical past tells us that the danger is bigger that we see a major fall quite than an additional rally greater.
Courtesy of Marketwatch.com:
indicators apart from positioning alone, this simply reinforces the draw back danger. Sentiment is clearly extraordinarily bullish. One simply has to spend an hour on Twitter to know simply how bullish everyone seems to be. Cash is flowing into Gold ETFs once more. If that weren’t sufficient, Citibank, the second greatest proprietor of derivatives on the COMEX, second solely to JP Morgan, is asking for $1600 Gold. Bloomberg, Reuters, CNBC, and the remainder of the mainstream monetary media are all cheerleading Gold not too long ago. Sentiment is a contrarian sign. When everyone seems to be bullish, it’s an excellent signal that the market goes to reverse, even when only a pullback within the short-term, or one thing a lot worse. The danger is that everybody is caught wrong-footed, solely trying as much as greater costs, and the market falls as a substitute.
From a technical perspective, Gold is clearly extraordinarily overbought in response to a number of indicators and throughout a number of time frames:
The day by day RSI simply peaked at 84, its highest stage since February 2016, and remains to be at 81.
The day by day MACD Line is now greater than the height in July 2016, at its highest since March 2016.
The weekly RSI is at 77, its highest for the reason that peak at 1923 in August 2011.
The weekly MACD Line is at its highest stage since September 2016, echoing the positioning information above.
In conclusion, once we take into account that Gold is excessive overbought and bullish at the side of the intense positioning information, forward of the G20 this weekend and an illiquid vacation week, there’s a excessive danger of a pending reversal in Gold after a $276, or close to 20%, rally from the low of 1167 in August.
To be clear, having damaged key resistance on the 2016 peak of 1377 and 1400 additionally, we now have a long-awaited greater excessive, so the pattern has turned UP. However an upward pattern is outlined by greater highs and better lows. The information suggests we’re going to get a wholesome pullback to the next low earlier than the following stage of this rally continues to greater highs.
Assist for such the next low is ~1375, the 38.2% retracement of the whole rally from 1167 to 1443, ~1335, the 61.eight% retracement, or ~1270, simply above the prior low of 1267.
Silver is prone to fall too, however I count on it to outperform Gold each on the upside and the draw back given its superior technicals, sentiment, and positioning information: The Banks are nonetheless comparatively impartial in Silver.
Gold miners are a beta play on Gold, and one ought to count on them to say no in tandem with Gold, however to a better diploma in proportion phrases, if this situation performs out.
On the finish of the day, if we do get a pullback, and probably a major one, I’d take into account this a present in anticipation of the rally to comply with. Solely a break of 1167 would trigger me to rethink the bullish potential for metals and miners going ahead. With this in thoughts, BTFD till confirmed in any other case, imho.