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An Unusual Occurrence in the Gold Market

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                The US Federal Reserve finally acted last month – raising its benchmark rate by 0.25%. Now that the speculation over whether the US will hike rates has been put to rest, analysts are busily speculating about what the Fed’s move means for the broader economies and markets in 2016. In precious metals, the markets continue to digest the Fed’s decision whilst the latest Commitment of Traders report indicates smart money is starting to move its positions, which could have dramatic effects on the trend for the precious metal markets.

 

The Fed hikes interest rates

                Ahead of the Fed’s decision last week, the Wall Street Journal reported that ‘a shift to higher rates is expected to hurt gold, which doesn’t pay interest and costs money to hold.’ Much of what’s said in the financial media concerning interest rates is wrong, especially when it comes to their impact on precious metals markets. Recent history shows their assertion to be false:

                The Fed last raised rates between June 2004 – June 2006. Over that period, gold prices rose from under $400 per ounce to over $700 per ounce.

 

The Fed’s 0.25% hike won’t in itself change much in the real economy. But it may get investors thinking about the possibility of inflation rates emerging from these lower levels. The Fed noted that “monetary policy remains accommodative.” It vowed to continue reinvesting principal payments and rolling over its holdings of Treasuries, agency debt, and mortgage-backed securities. Its $4.5 trillion balance sheet won’t be shrinking anytime soon. Overall, the Fed’s Statement was widely interpreted as dovish (cautious).

 

                Gold and silver prices both advanced on Wednesday following the Fed’s decision, fell the next day and have since steadily advanced higher. All the noise aside, there is plenty of fundamental support for the case that the metals are at or near a turning point.

 

                Demand for gold and silver coins will set records this year. Meanwhile, spot prices have traded below mining production costs for much of the year – presaging supply destruction in the months ahead. That is a far more important development in the outlook for precious metals markets than anything the Fed did last month, particularly when you add the unusual situation occurring on the COMEX futures market.

 

COT Report Indicates ‘Smart Money’ traders have gone Bullish on Gold

                The Commitment Of Traders (COT) is a weekly report which provides a snapshot of the positions of large institutional traders and small speculators in the Precious Metals futures category, providing up-to-date information about the trend and the strength of the commitment traders have towards that trend in each metal of the PM markets. Knowing what the big traders or smart money as they’re referred to (commercials) are doing through the COT report gives us some idea about the trend for a particular asset.

                The report essentially shows the net long or short positions for each available futures contract for three different types of traders.

  • If you invest in something that you think is going to rise in price, you are ‘long‘. If traders are overwhelmingly long or increasing their long positions then we will have a bullish bias on that market.
  • Similarly, you’re betting that something that something is going to fall, you are ‘short‘. If traders are short or increasing their short positions then we will have a bearish bias.

 

And that, as the saying goes, is the long and short of it.

 

The latest CFTC report that came out last week indicated that the commercials, as they’re called, who are usually enormously net short, are now almost net long. The fact that commercials are effectively net long and the public is abundantly out (despondent selling at the bottom of the market?) – that is a reason to take notice.

 

 

Commercials are always ahead of the public. The last time we saw this happen in the other direction was when the commercials went overwhelmingly net short back in November 2011. They are the ones that call the top, they’re the ones that call the bottom, so that alone has gotten my attention.

 

The next few months and, quite frankly ALL of 2016, are going to be interesting, to say the least.

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