Macro: Sandcastle economics
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Gold lacks sparkle despite improved outlook
Ole Hansen
Head of Commodity Strategy
Summary: Gold hasn't managed to sustain the momentum from last week's energetic spurt higher but shifts in other markets, notably equities and the US dollar, could lend a little shine despite resistance just below $1,300/oz.
Gold is struggling so far to build on last week's strong performance where it managed to fend off the selling that emerged following its technical break below $1,275/oz support, despite record US stocks levels and an attempted break higher by the dollar. Even the strong USGDP on Friday – later described as being due to one-off measures – was ignored with short-covering supporting the metal into the weekend.
Below are a couple of charts to bear in mind.
US dollar
Speculative buying of dollar against nine IMM currency futures has picked up in recent weeks with the combined dollar long reaching $32.4 billion, the highest since December 2015. Traders are clearly looking for additional dollar strength, especially against the euro ($15bn equivalent) and the Japanese yen ($11bn equivalent).
The euro reached a 22-months low last week at €1.111 but once again the selling seems to have run out of steam after it recovered back above €1.12. A meaningful gold supportive short-covering rally remains for now as elusive as the risk of a stock market correction and it will probably require a move back above €1.15 before such focus begin to emerge.
Stocks
While the S&P 500 index is toying with the 2,941 level, its record high from last October, the expectations of central banks keeping dollar liquidity ample and the Fed funds low have led to an increased short position in the Cboe VIX futures. In the week to April 23 the non-commercial net-short reached a record 177,754 lots. This was some 3k lots above the previous record which occurred a few months before the February 5, 2018 blowout, an event which shook the market and took down a couple of major short VIX exchange-traded funds. Short sellers are once again being attracted to the combination of falling volatility and rising contango (spot volatility lower than future volatility).
Such an elevated short is once again attracting some attention. While it can continue to build, the potential impact of a stock market correction could potentially once again be a source of demand for gold as an insurance.
While the S&P 500 index is toying with the 2,941 level, its record high from last October, the expectations of central banks keeping dollar liquidity ample and the Fed funds low have led to an increased short position in the Cboe VIX futures. In the week to April 23 the non-commercial net-short reached a record 177,754 lots. This was some 3k lots above the previous record which occurred a few months before the February 5, 2018 blowout, an event which shook the market and took down a couple of major short VIX exchange-traded funds. Short sellers are once again being attracted to the combination of falling volatility and rising contango (spot volatility lower than future volatility).
Such an elevated short is once again attracting some attention. While it can continue to build, the potential impact of a stock market correction could potentially once again be a source of demand for gold as an insurance.
Futures and exchange-traded funds flow
Hedge funds that follow strategies based on technical analysis/momentum, correlations and macro-economic considerations, among others, are once again holding a net-short in COMEX gold futures. The latest report covering the week to April 23 saw an almost five-fold increase in the net-short as long positions got dumped and fresh short positions added in response to the break below $1,275/oz, which was later rejected.
Total holdings in exchange-traded funds, meanwhile, have seen a steady reduction since February. This in response to the continued recovery in stocks and as speculation about a US-China trade deal and massive amounts of Chinese stimulus reduced the focus on owing gold.
Hedge funds that follow strategies based on technical analysis/momentum, correlations and macro-economic considerations, among others, are once again holding a net-short in COMEX gold futures. The latest report covering the week to April 23 saw an almost five-fold increase in the net-short as long positions got dumped and fresh short positions added in response to the break below $1,275/oz, which was later rejected.
Total holdings in exchange-traded funds, meanwhile, have seen a steady reduction since February. This in response to the continued recovery in stocks and as speculation about a US-China trade deal and massive amounts of Chinese stimulus reduced the focus on owing gold.
With gold trading back above $1,275/oz some of the above mentioned fund selling has now been unwound. However, with outside markets not yet providing any support the upside remains limited at this stage with focus on resistance just below $1,300/oz.
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