Commodities Corner: The Collapse Continues, Can Gold Glisten?

Commodities Corner: The Collapse Continues, Can Gold Glisten?

Commodity markets remain under pressure in the opening weeks of 2016 trade, with forecasters slashing Copper & Crude predictions for the year ahead. The continued collapse in commodity prices is the worst and most sustained decline in the past 30 years as, according to CFTC data, speculators load up on bearish bets replicating positioning last witnessed in the 2008 global financial crisis. It is noteworthy that often times when the market mood and sentiment reach these extreme levels we experience very volatile price action as over crowded trades get squeezed, while the dominant trend is maintained we can experience violent moves in both directions making trading conditions treacherous for the uninitiated.

Fundamental Flows

With Crude oil piercing $30 a barrel yesterday it seems reasonable to expect some profit taking from long term speculative shorts as these big round figures have both order book and psychological significance in the near term. Yesterday the wires were alive with murmuring from some of the second tier OPEC producers calling for moving forward the next meeting in the light of current price declines.

Copper as with Crude has continued to crumble, I still anticipate another leg down in prices to test 1.83 where I would see the potential for slightly strengthening in Q2, but thereafter decline in anticipation of a large Q4 surplus, similar to price behavior last year.

Gold prices rallied amid the global risk asset sell-off, triggered by China volatility. However, late last week, there were signs of stabilization in China, and the payroll number suggests a still solid US economy. Gold rallied strongly during the first week of 2016, rising from $1060 at the end of 2015 to above $1100. I see three factors predicating the rally: the volatility in the Chinese stock market and CNY, which led to a global risk asset sell-off and safe haven demand; soft US manufacturing and construction data, which pushed down hiking expectations; and the very large net short positioning held by managed money for gold.

I will be monitoring these factors closely to determine if gold can change its medium-term downward trend. China macro developments are important for two reasons: their effects on global risk asset prices and a US rate hike, echoed by Fed comments earlier in 2015. The circuit breaker introduced at the start of 2016 is cited as one major reason for the excessive stock market volatility. After its suspension on Thursday evening, China stocks were on a stronger footing on Friday. The Chinese government appears to have stabilized the stock market and CNY exchange rates on Friday. If both can be managed in similar fashion as in Q4 15, its bullish effect on gold might fade.

The spanner in the works for higher Gold prices is the perceived view of the rate of hikes from the US. The opening of 2016 has registered a raft of weaker-than-expected data, manufacturing, construction and business sentiment all coming in below expectations. This initial weaker domestic data was somewhat countered by the robust readings in US employment data last Friday, the 292k headline print and upward revisions to Novembers data keeps the FOMC firmly in play, market watchers believe that the weakness in the December data prints will be reversed driven by the stronger employment backdrop, this said any cracks in the employment data could portend a more sustained period of data misses.

Finally, gold needs to recapture investor attention to sustain a price rally. Based on CFTC data, managed money accounts have been net short gold for eight consecutive weeks, as 5 January 2016, the longest period on record. The key message is the lack of gross long positions. As of the end of 2015, gross long positions in COMEX gold futures were at their lowest level since 2008. Gross short positions are 20% below the peak reached in summer 2015. Thus, the net short positions are more of a reflection of a lack of long interest than an aggressive short. With three years of annual losses and $800 off the high, a $50 rally may not be enough to trigger large investor inflows.

Physical news flows have taken a backseat to macro developments. China’s central bank, the PBoC, purchased 19.6 tonnes of gold during December. This was slightly lower than November’s 21.54 tonnes, but still within range of the monthly pace since data became available in the middle of 2015. This purchase happened while the PBoC had its largest drop in total FX reserves on record in the same month, indicating its commitment to building gold reserves. Demand for China and India continued their mediocre pace. In November, China imported 119.6 tonnes of gold from Hong Kong and Switzerland, up a modest 2.4% m/m but down 32.5% y/y. In the meantime, the cash premium dropped to negative in India indicating continued softness in demand.

Technical & Trading Takeaway

As highlighted in last weeks piece I have initiated a long gold position.
  • I will be looking to buy a repetition of this pattern, buying a pull back to test 1080/60 targeting an initial test of the descending trend line at 1140/50.

Here is last weeks chart

gc131

Price action has tracked our market map pretty well I have opened my first Gold long at 1080, I will add a position at 1060 giving an average fill of 1070 with a stop at 1050 on my net position targeting 1150 initially as per the chart below.

Trading Update: Longs from 1080 stops to entry, cancel 1070 order.

2016-01-13 13_12_49-

For updates on trade of the day set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick

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