Commodities | May 02 2013
-Gold sentiment swings wildly
-How much is speculative?
-Physical demand seen improving
By Eva Brocklehurst
Gold sentiment has swung the full spectrum in recent months. Bullishness on the back of quantitative easing and fears of more economic meltdown in the EU has turned into a sell-off. Despite the price falls, the global investor positioning on COMEX is long. Unusual given the prevailing sentiment, you would think. Macquarie suspects the data may be misleading because of index investor positions. Speculators could already be net short and this suggests a more bearish market, but with less room for more speculative selling.
UBS notes investor sentiment was dealt a blow when a member of the US Federal Reserve suggested QE could end sooner than expected, amid growing optimism for the global economy which reduced the appeal of safe havens. Physical demand has stepped up and this could provide a floor to the price, but the UBS analysts believe investor appetite will ultimately determine whether prices can go higher. UBS has updated 2013 average price forecasts to US$1,600/oz and views the precious metal averaging US$1,625/oz in 2014, against US$1,700/oz previously.
Silver, UBS finds, has stuck to its reputation of being the higher beta version of gold. The metal has outrun gold on the downside in reaction to shifting market views. UBS has revised its 2013 average forecast price to US$29/oz from US$32.30/oz. While platinum and palladium fundamentals remain unchanged, UBS has scaled back expectations given the relatively close affiliation with gold.
What of these long gold positions on COMEX then? Macquarie has taken a close look at the reports produced on the COMEX market by the Commodities and Futures Trading Commission (CFTC), a weekly submission that takes a number of forms. The one with the longest history makes a relatively simple split of traders into three categories. These are non-commercial, seen as speculators including hedge funds, commercial, being the hedgers, producers, and brokers, and non-reportable, which are traders whose positions are too small to meet reporting requirements but are generally thought to be individual speculators. Positions are either net long or net short. A speculative net position combines the first and third categories – non-commercial and non-reportable.
Macquarie notes, in the mid to late 1990s speculators in gold were almost always net short but since 2001 they have been continually net long, peaking in bullishness on December 1, 2009. Since then the net longs have slowly, albeit erratically, been reduced. Nevertheless, COMEX speculators seem much more net long than one would expect, given the relationship between the net long position and the gold price.
Comparing the two types of speculator, the non-commercial net long and the non-reportable net long, is even more puzzling. These series are normally highly correlated, but now the non-reportable net long has fallen to almost nothing while the non-commercial net long remains quite high. What's going on? Macquarie theorises that one factor could be the development of the index investor, which has changed the structure of the market. So the net long position of the speculator is giving a false reading? It's not that simple.
Commodity index fund investors were unheard of in 1999 but by end of February 2013 they accounted for a net US$204bn of assets under management, according to another CFTC report. These funds invest in commodity markets through futures positions allocated according to the weights of a commodity index. Gold is a component of these indices and, as of the end of February, gold positions were a net US$18.8bn, made up of US$24.0bn long and US$5.3bn short. Macquarie notes there is no data on how directly this translates into COMEX positioning, but if the notional contracts were added to the positions on COMEX then the sum of all speculative positions is net short.
Before presuming COMEX speculators are actually net short there are criteria that must be dealt with. Macquarie finds good reason to exclude commodity index investors when judging the true position as their investment is usually across a basket of commodities, not just gold, and therefore cannot be correlated with the gold price. Also, are these index investors identified by CFTC actually held on COMEX? Some may not be. Also, swap dealers complicate matters as CFTC classifies them as commercials because they are hedging their exposure to index funds.
Taking all this in means we're back to square one, viewing COMEX speculators as net long, with a little adjustment. Macquarie considers the net long or net short positions on COMEX at arms length. Speculators on COMEX might be net short, given the preceding exercise, or they might still be slightly net long. Either way, they are more bearish than commonly thought and that illustrates the current mood in the gold market. It also provides less room for further speculative sell-offs, in Macquarie's view.
After all that speculating maybe it's back to physical demand. Citi has taken a look at media reports suggesting strong gold buying trends are emerging in China, India and even the US, where the US Mint temporarily suspended sales of 1/10th oz gold bullion coins. The analysts make the point that gold demand is not all about speculators and exchange traded funds (ETF). Jewellery demand has shared an inverse correlation with gold prices. This correlation has weakened in the past 15 years but remains negative. Thus demand should increase with weaker pricing.
So, the short-term outlook for gold should improve despite the ongoing decline in investment related holdings. Citi also notes that ETF gold holdings hit a record high of 2,632 tonnes at the end of 2012 and have steadily fallen to below 2,400t. Similarly, speculator interest measured by COMEX net long positions is sitting near recent lows.Citi's forecasts have been reduced for gold to an average of US$1,555/oz in 2013 and US$1,435/oz in 2014.
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