Money Managers Left Gold Shorts At A Record Pace

Strengths

·         The best performing metal this week was palladium, up 2.16 percent as hedge funds boost their net long position to a 7-month high on supply concerns. Traders and analysts in the weekly Bloomberg survey were the most bullish in a month as gold heads for its highest price since mid-July. The yellow metal was up for a fourth straight week, the longest run of gains since January, as sentiment is increasingly bullish and investors are adding to their holdings, according to Bloomberg data.

·         Exchange-traded funds (ETFs) backed by gold hit a two month high this week. Gold futures gained on Thursday despite the equity selloff slowing and the U.S. dollar firming. Holdings of gold-backed ETFs rose to 2,118 tons as of Wednesday, the highest level since the end of August.

·         Japan’s largest bullion retailer, Tanaka Kikinzoku K.K., reported that sales of gold bars rose 52 percent year-over-year in the first three quarters of 2018. This demand was fueled by falling gold prices, writes Masumi Suga of Bloomberg. Nine month sales of gold bars totaled 640,089 troy ounces while platinum bar sales for the same time period totaled 6,792 kilograms, a 17 percent increase year-over-year.

Weaknesses

·         The worst performing metal this week was platinum, up just 0.22 percent as shorts added to their bearish position. Reports came out this week that Venezuelan President Nicolas Maduro has been illegally exporting his country’s gold to Turkey in an effort to rescue the collapsing economy, according to a top U.S. official. Mining minister Victor Cano said that Venezuela was no longer sending its gold to Switzerland, but rather to allied country Turkey, where there isn’t risk of the gold being seized under international sanctions. Meanwhile, Turkey continues to be a bullion seller, with total gold reserves falling over 6 percent for the year and down 11.3 tons from August to September.

·         China’s purchases of gold from Hong Kong fell to the lowest in more than seven years due to possible shifts in trade routes by suppliers. Capital Economics economist Ross Strachan remains positive, saying that “we don’t believe that jewelry demand has been weak enough to explain this sustained shift and instead it seems likely that it reflects businesses changing supply routes.”

·         Goldcorp Inc.’s stock fell almost 19 percent on Thursday after reporting a $101 million loss for the third quarter, compared to $111 million profit in the previous year. Peter Jacobs, an analyst with Stifel RMG Group, said that “it’s almost as if it’s business as usual, just another failed gold mining stock.” Goldcorp CEO David Garofalo said that there are an unhealthily large number of gold miners competing for the same capital.

Opportunities

·         Bloomberg data shows that money managers left gold shorts at a record pace, just a week after bets against the yellow metal hit an unprecedented high. Based on data going back to 2006, we saw the biggest short followed by the biggest buy this week. Bloomberg’s Eddie van der Walt writes that if the short position keeps unwinding, then an upward pressure in gold prices should follow. When money managers moved to a net long position in 2015, prices rose shortly after by 30 percent.

·         Central banks are on a gold buying spree and 2018 could be the first time in five years that central banks increase their purchases of the yellow metal. Net purchases are forecast to rise to 450 metric tons this year, up from 375 tons in 2017, according to consultancy Metals Focus Ltd. Junlu Liang, a senior analyst at Metals Focus, said that “official sector purchases are likely to remain healthy, as a result of ongoing efforts to diversify reserves among emerging market countries.”

·         Morgan Stanley released a report this week saying that inflation is here and “this time it’s for real.” They cite two reasons for expecting inflation to rise: wage growth improvement globally and a changing macro backdrop. Economists write that 2012 to 2016 was characterized by deleveraging but, since 2017, the global economy has moved beyond that and a clear sign of change is the pickup in global capex growth. The United States’ gross domestic product (GDP) growth for the third quarter came in above expectations at 3.5 percent, while consumer spending also unexpectedly accelerated to a 4 percent increase, the best since 2014. Perhaps consumers are pushing buy decisions forward in expectations of higher prices in the future.

Threats

·         Ned Davis Research has urged investors to reduce their holdings in U.S. stocks for the second time this month, citing a worsening global bear market. Chief global investment strategist Tim Hayes said this week that “we’re in the midst of a global bear market with increased downside participation from the overvalued U.S. market and technology sector that helped the U.S. outperform” and that “conditions are likely to get far worse before they get better.” Bloomberg’s Lu Wang writes that there is a growing consensus that the U.S. is not immune to the market turmoil that has swept through Europe and Asia this year. JPMorgan issued a warning that the $7.4 trillion in passively managed assets around the world are at risk of momentum selling during market downturns and are heavily concentrated in large-cap and U.S. small- and mid-cap stocks.

·         In an interview on CNBC this week, John LaForge of the Wells Fargo Investment Institute said that he believes the gold rally will fade and prices will drop in the next few weeks. LaForge estimates that gold’s bearish period will last another three to five years with choppy trading dominating the environment and prices falling in the $1,050 to $1,350 per ounce range.

·         SPO Partners & Co., a $5 billion firm that has managed money for almost 50 years, is closing. Eli Weinberg, co-managing partner, said that “today, we are finding it exceedingly difficult to deploy capital with an acceptable margin of safety.” A top Federal Reserve official issued a rare public warning this week saying that banks appear to be going after increasingly risky deals and forgoing protections against borrowers going bust, writes Bloomberg. Todd Vermilyea, head of risk surveillance and data, told bankers at a conference in New York that “some institutions could be taking on risk without the appropriate mitigating controls.”

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