Gold: A picture tells a thousand words

The net long dollar position on Inter continental exchange is 150 times the six-year average; CME Euro is heavily oversold

LONDON - 

As gold appears to be marking time amidst an array of uncertainties, it is probably quicker for the reader to look at a series of pictures than to be presented with screeds of text.  Essentially gold's superficially lack-lustre performance in the middle of February can be lain at the feet of questions over future economic policies for the world's largest industrial countries, including interpretation of Dr Bernanke's latest statements, the moves within China and the latest concerns over Europe, notably the likelihood of a downgrade of Greece's debt.

We therefore show here a series of charts, revolving around some of the important net speculative positions on the major exchanges, based on numbers reported by the Commodities Futures Trading Commission.  What they show (the latest figures are only available up to close of business on 23^rd February ) is a large swing away from the euro and towards the dollar, while speculators have also been melting away from gold since the price registered its high in early December.

These charts reflect only one part of the market's activity, but one thing that they do show, at least in terms of US speculative activity, is that the dollar bottomed out considerably before gold came off the top, effectively in the middle of October.  The instrument shown here is the US Dollar Index position reported by the "I.C.E.", or IntercontinentalExchange, which turns over very heavy dollar trading, although the net speculative positions are comparatively low when compared with those in the euro on the CME or gold on COMEX.  Nonetheless they reflect sentiment.  The reported positions relate to contracts of $1,000 each, meaning that the largest recent net dollar short position, at 12,521 contracts, was equivalent to $12.5 million.  The swing since then has been equivalent to $53.4 million to the long side and the latest position, a net long of $40.9 million, is almost 150 times the average since 2004.

Meanwhile the net euro position on the CME is even more extreme.  Taken over the same period, the net speculative euro position on the Chicago Mercantile Exchange has averaged a long of $4.8 billion euros.  In mid-February the position was a net short of 8 billion euros; the outright long is at 71% of the average for the period, but the short is twice its average.  The prospect for a short-covering rally in the euro in the near future must be debatable, to say the least, and, bearing in mind that the currency has weakened against the dollar by 2% in the week following date of the latest speculative position reports suggests that the short has been extended even further.  The euro long topped out in early October, just before the dollar index turned higher, at €9.4 billion, meaning that there has been a swing of over r€17 billion in just over four months.  In dollar terms, based on prevailing exchange rates at the relevant dates, the swing amounts to $12 billion.  Weekly flows of funds amount to a net extraction of almost $13 from the position.  Any rally could therefore be sharp.

The swing in the net speculative gold position also amounted to a drop equivalent to $12 billion.  The record net gold long on COMEX was registered in early December just before the price topped out, at 959 tonnes with a value of $37.0 billion; by mid-February this had contracted to 684 tonnes, with a value of $24.5 billion.  Weekly flows of funds show a withdrawal of almost $14 billion from the position.  Speculative interest has been waning on both sides, with combined longs+shorts falling by 18% since early December.

So on these very simple figures, the euro is positioning itself for a short-covering rally at a point in time yet to be determined.  With weak-handed holders sliding away from gold and the short position not far off the recent high of mid-November, gold will be likely to be a co-beneficiary to any recovery in the euro, especially if this (as would seem to be the most likely trigger) prompted by renewed concerns over the US' national balance sheet.  Calling the timing, of course, is another matter, requiring analysis of a whole host of other parameters.

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responses to this article

Isn't it ironic that the PICTURES are hard to see given the title of the piece Isn't it ironic that the PICTURES are hard to see given the title of the piece by Anon on February 25 2010, 14:26 Find this comment inappropriate? Report it

Gold The picture makes it perfectly clear. I should buy gold, no, wait, I should sell gold, no, wait, I should... by The Recusant on February 25 2010, 22:08 Find this comment inappropriate? Report it

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