The real reason for gold’s drop
We noted several weeks ago that gold may be setting up for a medium-term top. Since then, gold has fallen about $55 and has posted a new four-month low. As the chart below shows, gold has been falling even though the dollar has been weakening, which is an unusual situation that suggests underlying weakness in gold. In addition, physical gold assets are declining in gold ETF funds, which means some investors are cashing in their chips. (See chart below fundamentals.)
The current gold sell-off is being caused mainly by reduced financial crisis fears, as evidenced by the twin sell-off in the dollar and gold on reduced safe-haven demand. The U.S. economy has picked up significantly in the past several months and slowly is growing its way out of the 2008-09 financial crisis. China’s economy has been slowing, but not by nearly enough to cause a serious risk of a hard landing. Germany is growing strongly, giving a lift to Europe as a whole. Eurozone officials finally are drawing up more serious plans to address the European debt crisis. Adding to the negative mix for gold, ECB President Trichet has started talking tough about inflation, which increases the chances that he will start to drain reserves later this year. The Fed likely will start draining reserves by early-2012 at the latest.
Gold has an ephemeral value. Gold’s perceived value is driven more by technicals and market psychology than by the true supply and demand factors seen in most commodity markets. Analysts and traders like to talk about “fiat currencies,” and the reality is that gold is a “fiat metal” — it only has value because human beings decided it does. In any case, with the current easing of crisis pressures, gold’s value is downshifting and we see that process continuing over the near-term as the stock market rallies and the European crisis ebbs.
If given a choice of which metal to be long on a five-year trade, we would rather be long copper than gold. Copper’s strong demand picture is much more identifiable than for gold, and copper benefits from the long-term global development theme. Gold’s demand, on the other hand, is driven by the dollar and by crisis levels, which are much shakier demand variables.
Proceed to Page 2 for the latest COT data...
Also producers and swap dealers have been liquidating their shorts as you can see from the weekly chart below. In the old legacy COT report you can see that Commercials are at a 52-week net high with -197,483 contracts. Back on Oct. 1, 2010, Commercials were at a 52-week net low at -302,740 contracts. Remember this is “big money” moving around, much like an elephant in a room. When the elephant moves you best move with it or you can picture what will happen. Have a prosperous trading week.
| Commodity |
12-mo low |
12-mo hi |
28-Jan |
21-Jan |
| Cattle (feed) |
-2,917 |
7,100 |
-1,290 |
35 |
| Cattle (live) |
-73,179 |
-18,177 |
-31,328 |
-31,287 |
| Hogs |
-38,039 |
836 |
-21,232 |
-20,922 |
| Corn |
-396,212 |
119,389 |
-387,155 |
-396,212 |
| Oats |
-6,317 |
829 |
-5,628 |
-5,957 |
| Soybeans |
-203,260 |
56,797 |
-186,699 |
-203,260 |
| Soybean meal |
-90,487 |
-6,350 |
-73,498 |
-77,895 |
| Soybean oil |
-111,786 |
32,394 |
-81,521 |
-94,660 |
| Wheat |
-20,973 |
82,654 |
-20,973 |
-9,811 |
| Orange juice |
-18,722 |
-6,588 |
-18,285 |
-18,178 |
| Coffee |
-47,729 |
-4,637 |
-41,391 |
-45,699 |
| Cocoa |
-43,055 |
8,586 |
-24,456 |
-18,561 |
| Sugar |
-238,100 |
-104,983 |
-199,293 |
-197,433 |
| Cotton |
-69,857 |
-12,970 |
-43,105 |
-39,272 |
| British pound |
-31,274 |
97,211 |
-15,400 |
-11,057 |
| Canada dollar |
-105,107 |
-13,109 |
-64,699 |
-75,356 |
| Euro FX |
-62,835 |
124,494 |
-28,088 |
-5,214 |
| Japanese yen |
-52,533 |
92,866 |
-27,413 |
-14,407 |
| Swiss franc |
-33,169 |
27,482 |
-15,882 |
-18,072 |
| US dollar index |
-46,250 |
2,587 |
-2,739 |
-6,901 |
| Mexican Peso |
-118,008 |
-14,488 |
-101,899 |
-96,857 |
| Australian dollar |
-102,706 |
-10,793 |
-62,135 |
-73,411 |
| S&P 500 |
-88,893 |
33,981 |
-43,666 |
-36,121 |
| T-note -10 yr |
-74,761 |
356,573 |
174,149 |
148,949 |
| T-bond -30 yr |
-43,324 |
158,206 |
19,198 |
35,170 |
| Eurodollar |
-1,179,414 |
105,872 |
-260,460 |
-243,509 |
| Crude oil |
-209,503 |
-23,057 |
-186,754 |
-209,503 |
| Heating oil |
-66,097 |
7,568 |
-56,873 |
-63,197 |
| Unleaded gas |
-91,597 |
-10,453 |
-79,332 |
-82,011 |
| Natural gas |
111,345 |
179,433 |
161,963 |
175,030 |
| Copper |
-36,201 |
1,793 |
-27,546 |
-34,305 |
| Gold |
-302,740 |
-197,483 |
-197,483 |
-206,471 |
| Platinum |
-33,831 |
-15,759 |
-33,434 |
-33,831 |
| Silver |
-65,413 |
-37,800 |
-43,146 |
-45,368 |
Commercial Net Tracker instructions: This form tracks the Commitment of Traders (COT) data for the commodity futures market. This form "looks" at the most recent five weeks of COT data and provides visual indications of the data. A) If the current value is at a 12-month low, the cell will display a red/burgundy background. B) If the current value is at a 12-month high, the cell will display a green background. C) If the current value went from net negative to net positive, the cell will display a blue background (indicating a bullish condition). D) If the current value is both a 12-month high and also went from a net negative to a net positive, the background will be green. You should view the data with green backgrounds to determine if they also went from net negative to net positive.
If you need help understanding how to understand how to use the COT report to your benefit, please email me at Gary@crbtrader.com and put COT report in the subject line. Please include your name and telephone number in the email.
Proceed to Page 3 for this week's detailed fundementals charts...
Gold prices corrected down to a 3-1/2 month low from last month’s record high of $1431.10 (nearest-futures December contract).
Bearish factors include:
- Hedge-fund liquidation after assets in gold-backed ETFs fell to a 5-1/2 month low as of Jan. 26.
- Slack inflation pressures with the Q3 core PCE deflator falling to +0.5% q/q, the lowest figure since data began in 1959.
- Speculation that an economic recovery will curb safe-haven demand for gold.
Bullish factors include:
- Continued strong demand for gold as a currency substitute and as an inflation hedge with quantitative easing programs in the United States, United Kingdom and Japan.
- Underlying safe-haven demand because of the European sovereign-debt crisis.
Fundamental Outlook — Bull market correction — Gold prices are correcting lower as hedge-funds liquidate record long positions, and safe-haven demand for gold is reduced with the stronger U.S. economy. However, the long-term picture remains bullish for gold as there is market uncertainty about whether the Fed and the ECB will start withdrawing liquidity before there is an inflation outbreak.
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