In its latest market positioning report, the CFTC observed that the amount of managed money present in the gold futures and options’ space shrank for the second week in a row last week. The net speculative long position declined by 51 tonnes last week; it now stands at 612 tonnes according to our analyst friends over at Standard Bank (SA). On the other hand, the net speculative short position climbed by 88 tonnes prompting the analytical team to note that “deleveraging in the futures market continues.”
One such money manager, Investment Protection Solutions’ Dominick Paoloni, who had held 10% of his clients’ funds in gold, sold 90% of those positions off last week. Albeit in the bigger scheme of things the $8.5 million liquidation by IPS is but a drop in the proverbial gold market bucket, the possible developing trend ought to keep some up at night wondering what it is that such money managers see out there. Perhaps they are becoming convinced that gold is less appealing amid developing deflationary conditions, perhaps they are tying its performance to the beleaguered euro, perhaps they have come to realize that gold’s inability to overcome $2K amid perfect ‘storm’ conditions this fall means that something has changed in the market’s psychology.
Indeed, consider the fact that the euro has come under an existential threat, and that certain governments are running up debt tabs faster than you can say “bailout!” Gold has not responded ‘properly’ to such alarming news or to the fact that there has been a trend by a few central banks to buy the metal despite record or near-record values. If the situation appears puzzling to some, then they ought to look no further than the US dollar and its supposedly impossible ‘revival’ lately. This is because if there is one asset that the European crisis has indeed bolstered (and then some) then that would be the supposedly moribund greenback. Given the divergent paths that gold and the dollar have been on since the Fed pushed rates to near zero, the current state of affairs should not surprise too many (yet, it does, and to a degree that is astounding).
Veteran market observer and publisher of the Value View Gold Report, Ned Schmidt notes in his latest missive to subscribers that “denial has been rampant in the markets for some time.” He points to silver as an example of a metal which “has been in a bear market since April, though some continue to deny that reality.” Mr. Schmidt diagnoses the current market paradigm as the “withdrawal of inflated expectations” (the double-entendre of ‘inflated’ should be noted here). He calls the previous forecasts for $2.5, $5, and $10K gold just as “irresponsible” as those that had promised is $100 per ounce silver to be a concrete reality by now.
According to one market forecasting tool that Mr. Schmidt includes in his latest analysis, there is additional pain to come in the precious metals’ space. However, noting that “markets do not go down forever” either, Mr. Schmidt goes along with the projection that gold might yet make a run to new highs, perhaps in late-2014/early-2015. However, “that high may not be significantly above the highs already achieved” concludes Mr. Schmidt. As for the current or near-term bottom in gold, the author of the VVGR does not expect that to be put into place until about April of 2012 and the figure could be as low as $1,110 “if no events positive for the price occur.”
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America