sábado, 14 de noviembre de 2015

sábado, noviembre 14, 2015

Gold - The Big Buyer Has Hedged His Bet
             
- Gold sinks -- it doesn't float.
- Stan the man is buying dollars.
- Divergences and the Fed continue to say sell.
- Technical action and follow through means new lows.
- Triple-digit gold coming soon.

The price of gold fell by 4.83% in the third quarter of 2015 and was down 5.82% as of September 30. Then a big rally took the price up to highs of $1191.70 by October 15. Long-term resistance at $1234, the May 18 highs, was in sight and was an important target for the bulls.

Gold looked precious as it rallied. Open interest, the total number of long and short positions in COMEX gold futures, rose along with the price. On September 30, the metric stood at 417,079 contracts; by October 15, it had risen to almost 460,000. The rise in open interest of 10.3% accompanied a price increase of 6.9%. Rising price and open interest is generally a bullish technical sign for a market. It means that higher price is attracting more buying. However, as gold approached the key psychological level of $1200 per ounce, it ran out of steam.



Gold sinks -- it doesn't float

It took gold two weeks to rise by almost 7%; during the three weeks that followed, it sunk. On Friday, November 6, active month December gold futures traded on COMEX closed at $1088 per ounce, down 8.7% from the October highs and down 2.4% from the close on September 30.

There are many reasons that gold ran out of steam. A lot of the buying in the gold market at the beginning of the fourth quarter was due to uncertainties surrounding global markets. As other markets stabilized, the fear factor dissipated. At their September meeting, the U.S. Federal Reserve opted not to raise interest rates, which helped propel the yellow metal higher.

However, improving U.S. economic data over recent weeks has strengthened the case for interest rate liftoff at the Fed's upcoming December meeting.

Moreover, weak economic conditions in Europe and other areas in the world have caused the dollar to rally aggressively over recent weeks. When gold reached its highs on October 15, the dollar traded to lows of 93.83 on the active month December dollar index futures contract. The weakness in gold has been due, in large part, to a huge rally in the dollar, which took it from those lows to highs of 99.47.

(click to enlarge)

The dollar index closed on Friday at 99.26 -- an increase of 6% in three weeks, which is a huge move for a currency.

Stan the man is buying dollars

Late last summer, Stan Druckenmiller the infamous hedge fund manager and ex-partner of George Soros, stated that he was one of the largest holders of SPDR Gold Shares ETF (NYSEARCA:GLD). While GLD gave Stan some love during the first weeks of October, that love turned sour as gold fell below the $1100 level once again last Friday. However, it appears that Druckenmiller is hedging his big bet in gold by buying dollars.

An article on Bloomberg on November 3 quoted the hedge fund manager as saying there is a divergence between the monetary policies between the U.S. and Europe. He said that ECB President Mario Draghi has "pretty much signaled step two," which is further interest rate cuts and quantitative easing to stimulate the lethargic European economy. He went on to say that there is "heavy breathing" at the U.S. Fed, who is preparing to raise interest rates. This implies that Stan is now long gold and short euro against the dollar. This makes him long gold in euros, a bet that the price of gold in euros will move higher. However, this has not been the case over recent sessions as the price of gold has dropped faster than the euro.

(click to enlarge)

The daily chart of gold in euros shows that it has dropped from around 1078 euros per ounce on October 27 to 1012.50 last Friday. It is possible that Stan is hedging his big gold bet with a long dollar position.

Divergences and the Fed continue to say sell

I whole-heartedly agree with Druckenmiller's opinion that the euro is going lower versus the dollar. I have been writing for quite some time that my initial target for the currency pair is parity. Aside from Europe's travails, which are bullish for the dollar and bearish for euros, the employment data released last Friday was better than expected. This gives the Fed one more reason to raise the Fed Funds rate in December. With higher interest rates in the U.S. and lower rates in Europe, the dollar becomes even more attractive than it presently is. A long dollar, short euro trade pays interest while you wait for what appears to be inevitable capital appreciation by virtue of the trend of each currency.

Meanwhile, the stronger dollar is bad news for gold bulls given the inverse historical relationship between the two.

There are more reasons to be bearish gold these days than just the dollar appreciation. I read an article on Seeking Alpha last Friday entitled Why You Should Ignore The Gold/Silver Ratio.

The author argues that this historical relationship is nonsense. While there are certainly arguments on both sides, I believe that one ignores historical relationships between commodity prices within the same sector at their own peril.

While the long-term average of this relationship over the past four-plus decades is 55:1 or 55 ounces of silver value in each ounce of gold value, it closed on Friday at the 73.8:1 level. I have noticed over my years of trading in the precious metals markets that this relationship tends to revert to the mean over the long term. However, over the shorter term, it tends to signal bear market conditions in precious metals when it is above the mean and bull market conditions when it is below. This is because silver is a more volatile and speculative metal, and it tends to attract speculative interest during bull market periods and very little on the downside.

Additionally, the current steep discount of platinum under gold of around $146 as of last Friday also provides a signal for the precious metals sector. Platinum is ten times rarer than gold, and it has more industrial applications on a per ounce produced basis. Therefore, it makes sense that platinum has historically traded at a premium to gold. The current discount is yet another piece of evidence that gold is expensive relative to other precious metal prices at its current price.

Technical action and follow through means new lows

Moreover, recent technical action in gold is bearish. Open interest in gold has declined as gold has moved lower, but it is still almost 20,000 contracts above the level on September 30. This suggests to me that there may still be stale longs who bought on the recent rally waiting and hoping that the price of the yellow metal turns around and moves higher. I do not think that there is enough short interest in the gold futures market at this time to trigger a short-covering rally. Besides, the trajectory of gold is clearly lower.

(click to enlarge)

The weekly chart of COMEX gold futures illustrates that momentum in gold is lower as the slow stochastic crossed to the downside on October 26. Last week gold moved aggressively lower, but the prior week it put in a bearish key-reversal trading pattern on the weekly chart.

This past week, it simply followed through and validated the bearish technical signal. Relative strength does not indicate an oversold condition, which tells me that gold has more room on the downside as we approach key support, the July lows at $1072.30 per ounce. Finally, historical volatility in weekly gold has increased to 16.7%. Gold historical volatility tends to move lower during times of appreciation and increase during times of bear market action. I therefore believe that all of the ingredients are currently in the gold market for a new multi-year low.

Triple-digit gold coming son

My target for gold remains $880 per ounce, which is right around the high price it traded to in 1980.

While we may not get there in the next move lower and it may take some time, gold failed again when it could not breach the $1200 level in mid-October. Gold has been making lower highs and lower lows since 2011, and the recent bullish move turned out to be a continuation of bear market action.

Meanwhile, I suspect that Stan Druckenmiller will get the dollar versus euro bet right in a big way. I just hope for his sake that he has a bigger position in the currencies than he has in gold so he can cover his losses and make some money.

As a bonus, I have prepared a video on my website Commodix that provides a more in-depth and detailed analysis to illustrate the real value implications and opportunities provided by the current state of the global economy and prospects for the future.

0 comments:

Publicar un comentario