Is It Time To Take Money Off The Table In Gold? Here Is What We Think

by: Hebba Investments
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Summary
 
- Gold speculators increased their bullish bets on the metal for the fourth consecutive week.

- Silver speculators raised their own bullish bets to the highest in the COT data history.

- Despite big speculative purchases of gold the price didn't react very strongly over the past week which signals weak demand elsewhere.

- Despite bullish long-term fundamentals (weak USD policy and geopolitical concerns) there is too much positive sentiment in gold and silver and investors should expect a pullback.

 
The latest Commitment of Traders (COT) report showed another increase in the net speculative long positions as speculators continued to increase gold and silver for the fourth consecutive week. What is surprising here is that this COT report closed before US President Trump's comments on his desire for a weaker US dollar - which pushed gold up close to $1290 per ounce. That means the COT positioning is much more bullish than even this report shows, which gets us quite uneasy from a contrarian perspective.
 
Though it is not surprise that traders are bullish on gold as geopolitical uncertainty reigns large across the world, with this week's hot spot North Korea as both China and US beat the drums of war there. Europe is no cup of tea either, as French elections still have quite a bit of uncertainty as a potential anti-Euro candidate may be elected.
 
We will get more into some of these details but before that let us give investors a quick overview into the COT report for those who are not familiar with it.
 
About the COT Report

 The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.
 
Though there is never one report or tool that can give you certainty about where prices are headed in the future, the COT report does allow the small investors a way to see what larger traders are doing and to possibly position their positions accordingly. For example, if there is a large managed money short interest in gold, that is often an indicator that a rally may be coming because the market is overly pessimistic and saturated with shorts - so you may want to take a long position.

The big disadvantage to the COT report is that it is issued on Friday but only contains Tuesday's data - so there is a three-day lag between the report and the actual positioning of traders. This is an eternity by short-term investing standards, and by the time the new report is issued it has already missed a large amount of trading activity.
 
There are many ways to read the COT report, and there are many analysts that focus specifically on this report (we are not one of them) so we won't claim to be the exports on it.
 
What we focus on in this report is the "Managed Money" positions and total open interest as it gives us an idea of how much interest there is in the gold market and how the short-term players are positioned.
 
This Week's Gold COT Report
 
 
 
This week's report showed a fourth consecutive week of increases in speculative gold positions as longs added 15,827 contracts during the COT week while shorts decreased by 8,975 contracts.
 
Despite this bullish increase in long positioning, gold closed the COT week down about $5 ($1258 last week and $1253 this week) - which is not a good sign as it suggests that despite bullish traders, gold is not moving up as strong as it used to with the same increase in longs (i.e. weak demand elsewhere). The fact that we are currently at around $1288 per ounce, means that traders are probably much more bullish than shown in the COT report.
 
The last time we saw five consecutive weeks of increases in net gold positions, was early July of 2016 - which signified gold's peak for the year. While that obviously is a negative, on the positive side, the net long position for that period was double what we are currently at (July 2016: 286,000 net long contracts vs. 4/15/2017: 140,000 net long contracts), so from that perspective we still have some room to move up further.

Moving on, the net position of all gold traders can be seen below:
 
Source: GoldChartsRUS
 
 
The red-line represents the net speculative gold positions of money managers (the biggest category of speculative trader), and as investors can see, we saw the net position of speculative traders increase by 24,000 contracts to 140,000 net speculative long contracts.
 
As for silver, the action week's action looked like the following:
 
Source: GoldChartsRUS
 
 
The red line which represents the net speculative positions of money managers, showed an increase in bullish silver speculators as their total net position jumped by around 5,000 contracts to a net speculative long position of 99,000 contracts.
 
This is the highest speculative positioning that we have seen in all our data on silver positions - even higher than the 2016 peak. That is saying a lot because silver still remains under $19 per ounce, while in 2011 it reached close to $50 per ounce with much lower speculative positioning.
 
This is a big red flag unless there is strong physical demand outside of paper trading. Looking at US Mint sales (the largest seller worldwide of physical silver bullion), 2017 silver sales are fairly low.
 
Source: GoldChartsRUS
 
 
US Mint silver bullion sales are running well below last year's pace, with 8 million ounces sold through March. That calculates to around 32 million annualized for 2017, which is close to 20% lower than 2016's sales of 39 million ounces.
 
We realize that the US Mint doesn't represent the whole silver market, but it is the biggest seller of silver bullion to investors and the weak sales in 2017 track most of the other mints across the world, so it represents a good proxy.
 
Silver seems a bit dangerous here as it rockets past previous speculative positioning records, investors need to be VERY careful in silver.
 
The Dollar is Getting Too Strong
 
By far the biggest event of the week for the gold market was the interview by US President Trump with the Wall Street Journal where we said he thought the US dollar was "getting too strong."
Predictably the US dollar fell and gold jumped:
 
Source: Zerohedge
 
 
Not only did Trump want to see a weaker US dollar, he also mentioned that he liked low US interest rate policy:

President Donald Trump said Wednesday the U.S. dollar "is getting too strong" and he would prefer the Federal Reserve keep interest rates low. Mr. Trump, in an interview with The Wall Street Journal, also said his administration won't label China a currency manipulator in a report due this week. 
He left open the possibility of renominating Federal Reserve Chairwoman Janet Yellen once her tenure is up next year, a shift from his position during the campaign that he would "most likely" not appoint her to another term. 
"I do like a low-interest rate policy, I must be honest with you," Mr. Trump said at the White House, when asked about Ms. Yellen. "I think our dollar is getting too strong, and partially that's my fault because people have confidence in me. But that's hurting-that will hurt ultimately," he added. "Look, there's some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good."
We will save our detailed commentary for a future piece, but investors need to remember two things about these comments.
 
First, traditionally presidents RARELY comment on US dollar policy, preferring to leave that to the Federal Reserve. As CNN's Ivana Kottasova comments:
For decades, U.S. presidents have observed a couple rules about the dollar: 
1) Try to avoid talking about the dollar. 2) If you must comment, say you support a strong dollar and leave it at that. Not President Trump.
 
Now, we are not taking sides on whether or not a strong US dollar is better for the United States, but what we will say is that Trump's deliberate talking down of the dollar is certainly not a positive thing for the currency.
 
Secondly, for those that argue that Trump can do very little to the US dollar other than this type of jawboning, we remind them that in two years President Trump's nominees could make up the majority of Fed appointees. Not only that, Janet Yellen's term as the board's chair ends February 3rd, 2018, while Stanley Fischer's term as vice chair ends June 12, 2018.
 
Add in the fact that a sitting Fed chair would probably be hesitant to do moves that go against what a new Fed chair would espouse (i.e. an outgoing USD hawk pushing strong-dollar moves into an incoming weak-USD Fed), and we see it being difficult for the existing Fed to push against what the current president wants.
 
Point being, if President Trump wants to see a weak US dollar he has the ability through policy AND Fed nominees (and the future Fed chair) to push that policy.
 
Our Take and What This Means for Investors
 
It seems that not only do financial markets have geopolitical concerns (bordering on potential war) to buoy precious metals, but now we have a US president that has broken accepted presidential norms to push for a WEAKER US dollar.
 
If he gets what he wants, the medium and long-term picture for gold remains very bright.
 
Having said that we will take the crazy position of being a bit bearish in the short-term as sentiment seems very bullish in gold and EXTREMELY bullish in silver - the bullish silver speculative position is at the highest levels across our multi-decade dataset.
 
 
The geopolitical concerns and potential weak USD policy has been buoying precious metals, but we see a very high probability of a short-term pullback in gold and silver.
 
Of course, this position is based on expectations of now major war breaking out in Syria or North Korea. When it comes to the short-term picture, an investor must look at expected events and not Black Swan type events (whose probability is rare over months let alone a week or two).
 
That means for short-term speculators the strategy would be to reduce precious metals exposure in the short-term by either selling gold and silver positions (SPDR Gold Trust ETF (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), and ETFS Physical Swiss Gold Trust ETF, etc). Or reducing risk by trading for less risky positions (switching miners to ETFs or from silver to gold). Of course this is only in the short term. The medium-term to longer-term position remains very bright (and bullish) for precious metals.

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