Here’s What I See Developing In Gold
Recent developments in the gold market suggest
that the yellow commodity may be due for a correction from current levels in the
weeks ahead. Specifically, these three developments include: over-bought market
positioning in gold futures contracts; declining physical demand for gold; and
over-sold market positioning in the currency markets.
First, What Does Market Positioning Mean?
Often, the way a market is positioned–the net
amount of long or short contracts outstanding–can be a very useful contrarian
indicator. The reason is that at extreme levels, these outstanding contracts are
susceptible to being washed out since there are fewer investors on the sidelines
to continue feeding current momentum. And once the price of the asset starts to
go against the direction of the outstanding positions, stop loss orders are
triggered and the move against the market is accentuated.
What Is Market Positioning In Gold Telling Me?
The gold futures market is currently net long
65,741 contracts. This is the highest reading for the commodity since the record
high 66,814 net long contracts measured on February 4th, just before the price
of gold pulled back 16% in the subsequent weeks when the market was net long a
record setting 66,814 contracts.
Why Do I Expect Physical Demand To Drop?
India, the world’s largest gold purchaser, is
concluding its Hindu wedding season this month. And most of the country’s $6.25
billion worth of gold sales take place during this season, as gold is the gift
of choice. Lower physical demand, which is a biggest determinant in the price of
gold, should therefore weigh the value of the commodity.
What Is Market Positioning In The Currency
Markets Telling Me?
Lastly, the price of gold is inversely correlated
with the value of the US dollar, that is, when the greenback moves up, gold
moves down and vice versa. Current market positioning in the currency markets
favors a positive correction for the US dollar. Net shorts against the greenback
are at their highest levels since before the Iraq war and currently stand at
$12.3 billion dollars versus the euro, UK pound, Swiss franc, Yen, Aussie dollar
and Canadian dollar. So we should expect any future pop higher in the value of
the US dollar to spill over into the gold markets and therefore push the yellow
commodity lower.
What Does This Mean For Equities?
Lower gold prices would push the stock prices of
gold mining companies, such as Newmont Mining Corp
(
NEM |
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PowerRating) and Barrick Gold
Corp
(
ABX |
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PowerRating), with large un-hedged exposure lower lower, as they depend on the
price of the precious metal for their profits.