Thursday, May 26, 2016

Funds Are Moving Out of Record Gold Position

Gold advanced into late-April along with a weaker path for the dollar index. We are seeing strong signs for the price of gold to continue to reverse those gains at an accelerating pace.  Since the start of the year, CFTC ‘non-commercial’ aka ‘large spec’ accounts - which include hedge funds, have moved to record net long positions in gold.  Open interest too had grown to multi-year highs, increasing 42% since the start of the year.  Soros and other have become vocal for bullish positioning. 

Will modest dollar strength along with a renewed Fed in ‘normalization’ cause a major gold sell-off as weak players exit longs?

Yesterday, gold futures aggregate open interest declined by 18,000.  This is the largest single session drop in open interest since November.  Since late January, open interest had risen by 224,000 or 60% from 373K to 597K.  Since May 16, open interest has declined by 12%.  This is an indication, punctuated by the step-up in activity yesterday, that longs are exiting their record positions. 


We showed earlier (Gold; Too Heavy for Funds to Hold and Why own Gold when you can own Stocks) that funds were well long of gold, having taken positions at the fastest pace in history and bringing total positions to the highest level in history.    


Since mid-March, and arguably since early-February, there has been no benefit from owning gold of itself, much less relative to the gains that were available holding equities indices or even bonds.  Yes, gold made a multi-year high above 1300 early in May, but that mark was fleeting and prompted a number of bullish calls. 


Since early-May, gold prices have begun to weaken and only recently do we see funds moving out of long positions.  Hedge fund position removal is expected to accelerate.  They have had a challenging year (or longer) and many are very interested in marking ‘wins’ where they can.  By booking a winning position in gold, they can offset some weaker portfolio showings. 


Even absent a strong majority of economic agents embracing the likelihood for the Fed re-engaging in policy ‘normalization’ and the removal of accommodation, gold prices for reasons stated above will find ready sellers.  Should the dollar continue to appreciate modestly, as I assume, from the early-May, 16-month low, this will increase the pressure on gold.    






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