Monthly Technical and Precious Metals Positioning Report - Gold - August 2018

Gold – in brief

Gold plumbed the depths last week, reaching 19 month lows. The price has been driven lower by further impulsive moves higher in the USD, with the DXY (Dollar Index) breaking up through technical resistance to hit 96.98 last week. As the US continues to outshine other major economies, it will be hard to fight a continuing dollar surge, especially as decent growth has yet to provoke higher inflation.

Concerns over the Turkish Lira have helped the Dollar as a safe haven.

Near-term risks to the USD include a disorderly end to a very lengthy rally in stocks. US dividend payouts have risen to US$117.10 bn in 2018 and technical targets that suggest the rally has limited scope, and a President who has no issues with back-trading the Federal Reserve. (“I’m not thrilled with his raising of interest rates. Not thrilled.”)

(Eventually, the big fiscal boost and the eventual decay of the interest rate cycle means that the Dollar will weaken as the trade deficit yawns even wider…but not yet.) Forecast growth in the US is expected to be 2.9 % this year. By contrast…

Japan

• Disappointing Q2

• Industrial production declined in May  (Japanese Indices of Ind. Prod. -1.80 % in June after sharp rebound in January.)

• BoJ continues to be ultra-loose. 10 year bond yield target remains ‘zero’ and short term ‘minus 0.10 %’. Tightening will eventually happen…

• 2 % inflation target a distant mirage under current policy settings.

• Trade concerns…

Forecast growth in 2018 is expected to be 1.1 %
Source: Bloomberg, Focus Economics, Bank of Japan

China

• May retail sales the slowest since June 2003.

• Auto sales down 1 pct YoY

• Fixed asset investment the slowest (+6.1 %) since 1998, when records began.

• Trade concerns front of mind.

Forecast growth in China is expected to be 6.5 % in 2018.    
Source: Deloitte, Focus Economics

Eurozone

• Q2 ‘better’ after a weak Q1.

• Free trade agreement signed with Japan

• Trade war less of a concern.

• Shaky political scene

Forecast growth in the Eurozone is expected to be 2.2 % in 2018.
(source: Bloomberg, Focus Economics)

Gold positioning and outlook

The ‘big short’ is the notable story in gold right now. The speculative Managed money sector is now shorter than it has even been (see graph) with positions as August 14th 18.183 million FTozs. The size of the short means that net positioning is the lowest that it has been ever, at -8.332 million Tozs.

To get an idea of the outlandish size of the position, see the chart below which shows how the current short outstrips the long-run average by a factor of 6.

Below that, another chart shows how the volume-weighted average sales compare with the current spot (US$1185 at the time of writing.) Speculative shorts have made hugely profitable bets against the price, although the last round of selling was barely US$34 above current levels as at the time of writing.

The size of the position has created expectations that it can help support a rally when shorts decide to significantly reduce – in practice all that has happened is that gold has cheapened and the short has got bigger.

N.B. Bloomberg calculates that the current short position is 3.255 Standard Deviations away from the mean basis the 52-week moving average of the short position – another way of saying that this is an extreme position, but one that might be a tiny bit dubious in its assumptions about…quite a few things actually.

Managed Money sector futures short grows from 2 million to over 18 million FTozs in the last five months…

Gold ETFs

Gold ETFs continue to see mild outflows.

Where to from here?

Gold was ferociously oversold last week, with the weekly RSI indicator touching 9 before recovering, and some sort of recovery is not unexpected given the powerful extent of the down move.

• Sino-US trade talks

• President Trump commenting on Fed policy decisions

• Guilty verdict in the Manafort trial

have managed to take some wind out of the recent leg of the US Dollar rally, along with a decline in 10-year yields – yields declined partly as money flowed into the dollar of course.

Bullish price action includes a ‘dragonfly doji’ on the Thursday 16th candle on decent volume in CME futures, followed by a minor rally in gold that targets congestion at US$1207. A break of the US$1212 level should open the way to US$1238.

The overall picture is one where US tightening still outpaces monetary policy elsewhere, and this will help sustain a firm US dollar until monetary policy elsewhere shows signs of converging on the US. The question is: when?

Gold and the DXY

Gold also appears to be slightly cheap given the DXY…

Relative tightening – how long for and when is that likely to end?

Looking at Bloomberg WIRP (‘World Interest Rate Probabilities’), the implied forward rate for the US benchmark lending rate to banks, Fed Funds, tightens from the current effective rate of 1.92 % (based on a current 1.75-2.00 % range.) to 2.60 % in September 2019, and 2.64 % by January 2020.

In other words, another 0.72 % of tightening is anticipated by the market as of August the 23rd. for America, or three 25 basis points of hikes, just ‘about’ where the neutral rate of interest is thought to lie for America.
 
The Eurozone is less aggressive, with Eurozone overnight interest rates expected to move from the current rate (-0.40 %) to -0.34 % by late July 2019. In other words, almost no tightening is expected over the coming year via the official rate.

Japan likewise sees very little evidence of official tightening over the coming 12 months. The official rate stands at -0.10 %, and current pricing implies that rate will tend to zero by August 2019.

Australia (current rate 1.50 %) implies tightening to 1.70 % by March 2019, so tightening of 0.20 %.

United Kingdom (current rate 0.75 %) is expected to tighten to 0.88 % by Q1 of 2019.

Summary

The market expects tighter monetary conditions to prevail in the United States over the coming 12 months. In the absence of other drivers, this should support a steady Dollar, until monetary conditions start to move back into alignment.

That’s going to keep gold facing a headwind at some level.
 
 
US Trade conditions and the Dollar
The recent improvement (to June…) in the US Current account has been accompanied by a rising dollar, however  the current account appears to be responding to dollar strength by worsening, and in the long run this should act to weaken the dollar.

Price targets for gold – short to medium term

Summary – the likely effect on gold

Gold’s short position can create a decent short term technical rally, to the resistances discussed earlier. Any recovery to a level below US$1260 does not really change the outlook below.

The macro outlook still favours the dollar for now, in terms of the monetary cycle, and real interest rates expressed via the TIPS yield have almost doubled since the beginning of the year. This should limit the extent of gold’s scope to rally.

The longer-term view is that gold should benefit as the tightening cycle comes to a natural end – with that becoming more apparent in late 2019, and as the fiscal boost in America feeds into a worsening current account balance.

Nicholas Frappell
Global General Manager

Disclaimer
The information contained herein is based on data obtained from sources believed by ABC Bullion to be reliable. However, such information has not been verified by, ABC Bullion, and ABC Bullion does not make any representations or take any responsibility as to its accuracy. Any statements of a non-factual nature constitute only current opinions, which are subject to change without notice. ABC Bullion (and/or its affiliates) may have positions in commodities referred to herein, and may hereafter liquidate such positions. Neither the information in this report, nor any opinion expressed, shall be construed to be, or constitute, a recommendation or an offer to buy or sell, or a solicitation of an offer to buy or sell, any commodities or other financial products mentioned herein.