According to the Commodity Futures Trading Commission’s Commitment of Trader’s Report, released Friday, February 26, speculators in gold recently increased their long position by 30,350 contracts. As Dennis Gartman wrote recently in the Gartman Letter, this is a “very material” change, the equivalent of 3.1% of open interest.
The specs were only very slightly on the long side late last year. But they’ve moved into the long column in a big way since.
Meanwhile, in India, the world’s key gold/jewelry consuming nation, there have been record slowdowns in gold sales, and the government there s(h)ocked that market on leap day with a proposed increase in the tax on gold sales as part of the new budget. As part of the same budget proposal, the finance minister, Arun Jaitley, suggested that gold import taxes will remain unchanged: that’s an effective tax increase as well, since the market has long expected and presumably had already priced in a cut in that tax.
Consumers and Speculators
The Indian government wants to reduce its citizen’s demand for gold in order to control the current account deficit. This is an ambitious project, since regular purchases of gold are a cultural imperative in much of India.
Are these offsetting trends? Are the speculators picking up what the jewelry buyers of India are letting loose? If so, that is itself a bearish sign. The prevalence of speculative demand over commercial demand for a product is itself one of the defining features of an asset-price bubble.
The spot price of gold was $1,060 in mid-January. It finished up that month at just above $1,120. It spent the early days of February rising rapidly toward $1,240. But in the second half of that month, the spot price zig-zagged repeatedly with $1,240 serving as its ceiling.
One possible view of this situation is that we are zig-zagging along at the top, and we’re about to head back down toward the $1,000 level.
Gartman, though, sees $1,250 as a point of resistance. To those of us who aren’t technical analysts by trade, the whole notion of a resistance level may be considered suspect. There is nonetheless some respectable academic support for it, specifically in the price of gold. Michael E. Lucey and Fergal A. O’Connor recently published a paper on their search for “psychological barriers in gold and silver prices.”
The two men found such barriers for gold. Tellingly, they couldn’t find them in the case of the movement of silver prices. Perhaps gold is truly unique, and even its supposed substitute doesn’t much substitute for its unique psychological pull.
Priced in dollars
Surely part of the problem for gold bugs right now is that gold is priced in dollars, and the U.S. dollar is strong. That’s pressing downward on all commodities, but perhaps gold more than most precisely because gold’s appeal (aside from its use as decoration and jewelry) is largely as a pseudo-currency: a medium in which to store one’s wealth when the dollar seems dangerous. Scholars have long observed that the hedging value of gold (and silver) is asymmetric. That is, precious metals serve as a better hedge in times of U.S. dollar devaluation than in times of dollar appreciation.
As February ended, spot gold stood at $1,233.90.
One of the pieces in the big picture of the future of gold is: crypto-currencies: bitcoin and its imitators, now and in the fullness of time. They certain seem to be siphoning off some of the gold bug sentiment, simply because the sort of theorist who wants out of “paper money” because paper is a matter of government fiat may go in either direction: toward the physical presence of an elementary stone, or toward the cyberspatiality of a commodity conjured up by an algorithm and its decentralized miners. So is value going into bitcoin that might otherwise be going into bullion?
That as I say is a Big Picture question. On a smaller scale, gold may not be going anywhere much in coming weeks. It may stay on this plateau, and in that case the best way to play it for alpha is by looking for non-directional inefficiencies.