The following (green highlights) is an excerpt and 2 of 10 charts from our February 21st Commentary, entitled The 2014 Gold Rally: The Real Deal, Or A Flash In The Pan?
Our Commentaries, 1 of 8 different reports that we produce for subscribers, are strategic in nature and provide a comprehensive analysis of specific areas of the US financial landscape looking one to several quarters out. Our Commentaries identify emerging intermediate term investment opportunities in specific financial assets, often before the actual new price trends become apparent.
Excerpt From: Market Commentary
Asset Class: Gold, US Interest Rates, US Equities
Topic/Title: The 2014 Gold Rally: The Real Deal, Or A Flash In The Pan?
Date: February 21st 2014
Gold prices first found their way onto our radar screen back in July 2013 because of some unusual investor positioning data from the Commodity Futures Trading Commission (CFTC), which we first displayed and discussed in our July 23rd report entitled Gold Prices Test Their First Upside Obstacle: Watch The Smart Money.
These data showed that in late June/early July gold producers collectively moved to an essentially unhedged position the futures market for the first time in more than a decade. This rare, unusual positioning indicated that the smart money was collectively convinced that gold was undervalued at $1200 per ounce. Unbeknownst to us at the time was that gold prices actually bottomed for the year just a few weeks earlier, at $1180 on June 28th. Prices then proceeded to spike higher to $1419 by the end of August, a $239 per ounce or 20% advance in less than 2 months. However, prices then subsequently collapsed right back down to $1180 by the end of the year, convincing many investors that this was just a bounce in a bear market, and that the larger 2011 bear market had resumed.
Then something interesting happened at the end of the year: the gold producers moved right back to that unhedged status in the futures market, just as gold prices dipped below $1200 an ounce. This further identified the $1200 area (at least to us) as a value area by the smart money. So far in 2014 gold prices have again aggressively rebounded, rising by $151 per ounce or 13% just since the beginning of the year.
In today’s report, we display and discuss a number of different market metrics including investor asset flows, investor sentiment, relative performance, price and trend structure, and intermarket relationships in an effort to answer the following questions:
- Is the 2014 rebound in gold prices just another correction with the 2011 bear market, or is this a sustainable new bullish trend?
- How much higher can gold prices realistically go? Where are the next upside targets?
- How long can the 2014 price advance potentially last?
- What’s the better place to be for bullish investors: outright gold or gold miners?
- How is a sustained rise in gold likely to indirectly affect the prices of other US financial assets?
Investor Asset Flows
The red line in the upper panel of Chart 1 below displays the data series that first shifted our focus to gold prices back in July 2013, the Commercial Hedger category of the Commitments of Traders data. Once per week the CFTC breaks down futures open interest into three categories, Commercial Hedgers, Large Speculators, and Small Speculators, and makes the data available to the public via their website.
As the name suggests, Commercial Hedgers use the futures market to hedge the value of their physical holdings in a commodity, and thus they atypically accumulate a net position against the trend.
One of the first things that you notice when you look at this chart is that the hedgers are almost always net short, because they are holding the physical asset. The green vertical highlights between both panels show that least net short (least hedged) extremes in December 2001, February 2005, and November 2008 all coincided with important intermediate to long term bottoms in the price of the gold contract (lower panel). The most recent of these extremes took place in July and December 2013, just as gold prices moved below $1200 per ounce, which identifies this as a value area for the smart money.
Since December, the hedgers have become collectively a bit more net short, at 72,654 contracts as of the latest data. However, this still qualifies as an historic least hedged extreme that, assuming history repeats, suggests that significantly higher gold prices are in store over the next one to several quarters.
Chart 2 takes a more near term look at investor asset flows via the daily total assets invested in the SPDR Gold Trust ETF (GLD), which is plotted along with its 21-day (1 month, red line) moving average in the upper panel.
The green highlights point out that expanding total daily assets during August 2013 and most recently since January 17th, above their 1 month moving average, coincided with the two most significant periods of rising gold prices since July 2013. This chart tells us that, in addition to the smart money establishing value near $1200 over the past 9 months, enough investor assets are now moving into gold on a day-to-day basis to establish and fuel a positive price trend. As long as these assets remain above their moving average, we will expect the current 2014 price advance to continue.
Chart 3 below measures investor sentiment according to a daily survey of near to intermediate term oriented individual futures trader bullishness on gold prices, which is plotted by the blue line in the lower panel.
Asbury Research subscribers can view the entire report by Clicking Here.