miércoles, noviembre 08, 2017

GOLD: THE PRESSURE IS GROWING / SEEKING ALPHA

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Gold: The Pressure Is Growing

by: Oleh Kombaiev



- The UST 10-year yield is likely to continue growing, which is a key pressure factor for the gold price.

- The geopolitical risks are becoming less relevant.

- While the gold price is growing, the hedge funds are selling.

Investment Thesis
 
The power balance in the gold market leans toward the bears, which implies a continued reduction in both gold and the SPDR Gold Trust ETF (NYSEARCA:GLD) (a fund that tracks the price of gold) prices.
 
 
 
In the short term horizon, the gold price will remain virtually tied to the level of the U.S. real interest rate, and, therefore, in this analysis, first and foremost, attention should be paid to the dynamics of UST10.
 
 
Over the last month, the yield of UST10 has grown to six-month highs and is now threatening to continue growing up to 2.65%:
 
 
 
Let's take a look at the factors that trigger this growth.
 
1. The December rate increase is already practically guaranteed:
 
Source: CME Group
 
 
2. Apparently, John Taylor who advocates tighter monetary policy seems to be the most likely candidate to replace Janet Yellen.
 
3. The U.S. Senate has adopted the budget for 2018 that could be considered a step towards Trump's fiscal reform.
 
4. Both direct and indirect indicators confirm the strong growth of the U.S. economy in the Q3. For example, the economists of Societe Generale predict that the first annualized estimate of GDP for Q3 2017 will reach the level of 2.6% on October 27.
 
 
United States ISM Purchasing Managers Index (PMI)
 
United States ISM Non Manufacturing PMI
 
United States Manufacturing PMI
 
 
I'm sure that in the next month the listed factors will contribute to the increased profitability of UST, which in turn will negatively affect the gold price.
 
Moving on.
 
In the previous post, I've proved statistically the sensitivity of gold to the geopolitical risks, in particular to a possible escalation of conflict between the United States and North Korea.
 
According to the latest Google Trends data, this situation continues to be relevant, but its popularity is declining:
 
 
I believe that the real risk of escalation remains low.
 
As for the funds' actions, I also do not see anything that could imply the formation or at least expectation of the bull trend in the gold market.
 
Let's start with the most obvious.
 
During the past five sessions, the funds have been continuously reducing the long positions in gold. It is particularly important that during the latest reporting week, the funds shifted from closing the long positions to building the short ones. In total, the funds have sold 91,174 contracts over the past five weeks, which is approximately a half of their current net long position.
 
 
The seasonality of the funds' actions implies a further reduction of the net long position:
 
 
I would also like to draw your attention to the lack of synchronization between the actions of funds and the dynamics of the gold prices, which also does not look like the bullish market.
 
During three weeks starting from August 15, the gold price surpassed the size of one standard deviation. It is noteworthy that such sharp price fluctuations did not force the funds to actively build their long positions. Moreover, the sharp increase of the gold price, witnessed from 3 to 10 October, was accompanied by the reduction of the funds' long position:

 
The funds were selling in the growing market - it is clearly a negative sign.
 
Putting It All Together
 
So, we see that: (1) the dynamics of the U.S. real interest rate remains the determining factor in the gold market, and a number of assumptions related especially to the probable future monetary policy of the Fed allows to expect further growth rates, which is negative for gold; (2) the geopolitical risks support the gold market, but their relevance reducing; (3) the actions of funds at least do not support the gold market.
 
All the above considered, my forecast remains the same - the gold prices will decrease to a level of $1,230 in the next two months.
 
 
 
 
Applying the foregoing to the dynamics of the SPDR Gold Trust ETF, I expect the fund price to drop to $116 and below in the next 60 days.
 
 

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