A Brief Update on Positioning and Sentiment in Gold

Even while gold’s fundamental price according to Keith Weiner’s calculations (in which he compares spot to futures prices) stands some $140 above the current market price (as of the end of last week), futures market speculators have turned more bearish on gold than at any time in the past 13 years.

 

BN-ID143_0428cm_J_20150428110208Photo credit: Lisi Niesner / Bloomberg News

 

When there is great unanimity among traders about a market’s direction, they are very often going to be proved wrong – at least in the short to medium term (i.e., over time periods lasting from weeks to months). The caveat is that even more pronounced positioning extremes have occurred in a few short time periods during the 1980s and the 1990s, and there is obviously no law that says this cannot happen again.

 

1-Gol CoT-1Last week, the smallest net speculative long position since January of 2002 was reported (this chart shows the net hedger position, which is the inverse of the net speculative position) – click to enlarge.

 

However, it is still quite noteworthy that speculators as a group are more bearish on gold today than they were at the lows of its 20 year long secular bear market in 1999-2000. This definitely means one thing: once a rally does get underway, there is going to be a lot of fuel to support it as this extreme in pessimism unwinds. Gold stocks meanwhile continue to diverge positively from gold and silver, just as they have exhibited persistent negative divergences near the 2011 – 2012 highs.

Here are a few more charts illustrating the current situation; first different ways of charting the net positions of speculators and hedgers:

 

2-Net PositionsNet speculator and hedger positions, as well as open interest in bar chart form – click to enlarge.

 

The next chart shows the very same thing, but trader positions are further dehomogenized, with small and large speculators as well as hedgers shown separately in a line chart. Open interest is charted as a line as well. Open interest in COMEX gold futures is actually historically quite large at the moment.

 

3-Net positions and OIGold futures market positioning dehomogenized further – click to enlarge.

 

The Bullish Consensus Compared to the 1999-2000 Lows

Sentimentrader has created the so-called Optimism Index, or Optix for short, which is an average of the most popular and well-known sentiment surveys and positioning data. From the web site’s description of the indicator:

 

“To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below, along with other measures of sentiment, such as from the options and futures markets. The combination of that data is the foundation of the Optimism Index, or Optix.

No matter what population the survey monitors, it tends to correlate very highly with all the other populations. People tend to think alike, and it’s rare to see any of the surveys diverge too far from all the others. The correlations among them are very high, and have been consistently so for many years.

Like most sentiment data, this one is a contrary indicator. When optimism becomes too high, we should look for prices to stall out or decline; when it is too low, we should look for rallies.

When the Optix moves above the red dotted line in the chart, it means that compared to other readings, we’re seeing a statistically extreme value. The bands are based on the past few years of trading, but you also want to look at the absolute level – if it’s at 90%, then there’s no question we’re seeing an historic level of bullish opinion. Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.

Conversely, when the Optix moves below the green dotted line, then the public is too pessimistic about the commodity’s prospects for further gains compared to their opinion over the past year. Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.”

 

4-Gold OptixThe Gold Optix readings since mid 2013 are among the lowest in history. On average they are far more extreme than those recorded at the secular bear market lows in 1999-2000. The most recent reading showing bullish consensus of a mere 14% is only 6 points above the all time low recorded in late 1997 and lower than any of the readings of the 1999-2000 period (the absolute low in that time period was seen in late February 2001 and stood at 16%) – click to enlarge.

 

As you can see, the recent period has been one of quite persistent and extreme pessimism. Since sentiment is largely a function of price movements, one must of course not overestimate its meaningfulness. However, one thing is certain: rare and noteworthy extremes tend to at least have short to medium term significance. Once a long string of extreme readings has been recorded, the probability that they will prove to be of long term importance rises strongly.

This is especially so given the fact that gold is currently approaching an important technical support area in the $1,040 to $1,050 region (the March 2008 high). Moreover, there are actually many parallels to the 1999-2000 period, most notable among them a rising stock market combined with ever greater weakness in junk bonds, a tightening Fed and concomitant dollar strength, and a flattening yield curve.

 

5-yield curveThe flattening yield curve, illustrated by the ratio between 10 and 2 year treasury note yields. In the short term, this flattening is actually quite bearish for gold, but at the same time it is actually long term bullish. This is so because it will ultimately trip up the echo boom and the economic recovery (such as it is), and bring about a reversal of the Fed’s current monetary policy stance – click to enlarge.

 

The next chart shows what has happened in terms of Fed policy and the dollar in 1999-2000 compared to 2014-2015. This may be helpful in terms of providing a potential road-map:

 

6-dollar index vs. goldFed policy, the dollar and gold in 1999-2000 vs. 2014-2015 – click to enlarge.

 

Conclusion

As we have pointed out on previous occasions, it is time for both traders and investors to pay very close attention to this market. What could turn out to be a major opportunity is slowly but surely taking shape.

 

Charts by: SentimenTrader, ShareLynx, StockCharts, goldchartsrus.com

 

 

 

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5 Responses to “Gold Positioning Update – New Extremes Are Recorded”

  • APM:

    Gold has broken through the EUR 1,000 support though and is currently trading at around EUR 970 per ounce. Not exactly showing strength here. Let see if the EUR 866.73 2013 low – on a daily closing basis – holds or gets taken out.

  • therooster:

    michaelfmh …. I think rates on debt will be governed by the migration of the market toward debt-free currency.
    The FED has little to no room for an increase in rates until such time that they feel some effect by way of the “supplementation” of debt-free liquidity in support of debt-free trades and economic stimulus. It’s the added liquidity that will not only allow rates to rise, safely, but also acts as the much needed catalyst for bullion prices to rise as price manipulation subsides. There are several notes in the chord.

    As I already stated above , banks are “pro liquidity”, not “anti-gold” but a polarized paradigm may not create the distinction.

  • 23571113:

    once the fed tightens its hard to see how gold and gold stocks will not collapse.

  • Kreditanstalt:

    It seems to me that gold stocks (with the exception of most juniors and the explorers) have been outperforming the Comex paper price for about three months. What changed in September…?

  • therooster:

    It’s the application of gold based currency and its stimulating movement that will free bullion from price suppression, imo. If you’re sitting on it for higher prices, you may wait a long time.

    Contrary to what some believe, banking interests are not “anti-gold” in letting the price go. They are “anti-hoarding of gold” in terms of its liquidity. Bankers are likely afraid of rising gold prices without having a modern “kick-point” where gold moves toward direct stimulation of the economy. People are creatures of habit and hoarding gold is part of that old tired habit. The last thing we all want to see is $2500 gold and a completely depressed economy because gold isn’t helping by greasing the wheels.

    Have bankers not put liquidity as a top priority in the past ? This should not be something that is seen as new.

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