Treasure Chest | Mar 05 2013
By Greg Peel
On the last Tuesday in February, US gold futures suddenly jumped US$35. Having suffered a major technical correction triggered by a set of Fed minutes that seemed to suggest a QE exit was nigh, gold bounced in the session after Ben Bernanke told Congress QE was definitely here to stay. The sharpness of the bounce made the analysts at ANZ Bank suspicious, and their suspicions were borne out by the subsequent release of US Commodity Futures Trading Commission data.
The CFTC data suggested naked short positions in US gold futures were at extreme levels, confirming the US$35 jump was very much driven by short-covering. ANZ warns that short position levels on Comex remain extreme, and that “managed money” shorts are sitting near record levels.
The CFTC splits what is currently US$85bn in gold futures shorts into two categories of holder – speculative and commercial. Commercial includes gold miners and merchants who will use the futures market for non-speculative reasons such as production hedging or offsets against physical holdings, while money managers use gold futures simply to take speculative positions. It is changes in these speculative positions that predominantly drive the near term movements in the gold price (including the underlying physical).
Looking at the wider picture, ANZ is bullish gold but not yet prepared to call a bottom. Sharp short-squeeze movements aside, there may yet be more price downside. Notably, gold held by the leading US ETF has dropped to 1254t from 1323t over two weeks. This 5% decline is not enough from which to call a trend, ANZ points, but enough to suggest caution.
If ETF investors start to move in number, the herd will usually stampede.
On the other hand, ANZ warns the 5% ETF reduction could simply represent one big fund reducing its gold allocation. Either way, it is clear that while gold has traded back and forth in a range since breaking down through US$1600/oz, daily sessions have often proven quite volatile. Extreme CFTC short positions add to volatility potential, so be wary that an overnight trickle of gold buying on whatever trigger could very quickly turn into a short-term flood.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
