Gold has been one of the worst performing asset in 2013 down close to 6%. Any of the reasons from the below list could be picked up for intellectual satisfaction.
1) Central Banks removing tail risk with massive pumping of liquidity, since Gold was largely thought as fear trade since onset of euro crises.
2) Improving Economic Fundamentals which will eventually lead to higher interest rates in future.
3) FOMC Minutes (for Jan Meeting) released on 20th Feb 2013, wherein reducing asset purchase plan was discussed. Gold was down $40 or 2.5% on that day with selling accelerating once minutes were out.
4) Large liquidation by ETF's due to any of the above reasons or otherwise.
Many other reasons have been attributed for the Gold fall in 2013 (Gold has been in down trend since 5th Oct 2012..when it reached recent peak of $1796).
INTERESTING PART ABOUT REASONS BEING ATTRIBUTED TO GOLD FALL IS THAT IF WE COMBINE THOSE REASON ATTRIBUTED BY VARIOUS EXPERTS...THOSE REASONS ARE MUTUALLY EXCLUSIVE OR CONTRADICTORY....for eg liquidity arguments are used as being driver of gold price since 1999-2000 and now even higher liquidity removing tail risks is being used as reason for gold fall.....This is the best part of fitting fundamental reasoning for price movement....same argument could be used to explain opposing price movement.
What determines Gold Price...??
It is rightly said about gold being toughest asset to value since there is no underlying cashflow but then we live in world where liquidity and cashflow are fungible. Many experts have argued that real interest rates drive the gold price and since we live in negative real rate environment, Gold prices can only go higher. Argument I find more comforting is Gold is hedge against Govt's and Central Bankers Accelerating Insanity. There is not a single driver of gold price and many reasons can be attributed for one's comfort.
Gold has been in bull market for 12 straight years till 2012, gaining close to 509% till 2012 end. though Gold did have parabolic rise in sentiment during July-Aug 2011 but rise was less than parabolic. Asset class which has been in bull market for 10-12 years tends to end with much sharper price rise than what Gold experienced in July-Aug 2011. Also, if July-Aug 2011 rise was indeed parabolic (though 25% rise between July-Aug 2011 could hardly be termed as parabolic) then fall should have erased large part of bull market gains. What we have had since Aug 2011 peak is massive time-wise consolidation (Current price @ $1575 is close to where July 2011 spike began).
Current Sentiment Reading Reaching Extremes.....
Start and End of bull markets becomes clear mostly in hindsight but price action in gold tells much different story than being end of gold bull market. Since, Gold is the most difficult asset to value, Sentiment picture can be very valuable in understanding price direction.
Adam Hamilton from Zeal Speculation and Investment have done great work in terms of reading current sentiment picture for Gold....and it comes out very clearly that Gold at current price could be great contrarian bet...
Contrary Gold Futures 2
Adam Hamilton March 8,
2013
Gold’s technical breakdown suffered in its recent capitulation
selloff naturally unleashed a flood of bearish sentiment. Traders are
totally convinced gold’s woes are just starting, that the worst is yet to
come. This pessimistic worldview is largely universal, even among futures
traders. But their collective bets are actually a strong contrarian
indicator. Their bearishness peaks right before major rallies erupt.
Futures speculators are generally considered the most
sophisticated of traders. With futures’ inherent high leverage, margin
requirements, limited lifespans, and zero-sum nature, they are far more risky
and challenging to trade than stocks. Thus the average futures trader is
much better informed and better capitalized than the average stock
trader. Unforgiving futures trading soon weeds out mediocre traders.
But nevertheless the surviving futures traders are still
human. They struggle with the same dangerous emotions of greed and fear
that plague stock traders. As a herd, futures traders grow too euphoric
and greedy after a price has surged too far too fast. So they flood into
longs near highs. And they get too despondent and fearful after a price
has plunged too far too fast. So they pile into shorts near lows.
And the latter has certainly happened recently thanks to gold’s capitulation.
As an unfortunate chain of news and sentiment fed on itself as analyzed in
depth in our latest monthly newsletter, futures traders grewexceptionally bearish. So they made big bets that gold’s price would keep
on falling, which in the futures world means taking the short side of
contracts. And these shorts reached incredible extremes.
US futures trading is regulated by the Commodity Futures Trading
Commission, an arm of the US government. While the CFTC can be a real
pain sometimes like all regulators, one good thing it does is publish a weekly
report called the Commitments of Traders. Released late
Friday afternoons, it shows what positions several classes of futures traders
happened to be holding as of the preceding Tuesday.
Futures are a
zero-sum game, every contract has one trader betting a price will move one way
against an opposing trader betting that price will move the other way. So
every dollar won in futures is a direct dollar loss from the counterparty on
the other side of the contract. Thus the total number of longs and shorts
in any commodity, including gold, are
always perfectly equal. Shorts can’t exist without offsetting
longs.
While total gold shorts always equal longs, the CFTC divides
futures traders into three different classes. These are commercial
traders, non-commercial traders, and nonreportable traders. These are
generally translated as hedgers directly using a physical underlying commodity
for business purposes, large speculators, and small speculators. The
aggregate positions held by each class can vary considerably.
The way it nearly always works in the gold world is commercial
hedgers mostly take the short side of gold contracts. They are dominated
by miners locking in future selling prices. And then speculators, both
large and small, take the offsetting long side of these trades. When the
total longs and total shorts for each
class are added
up, the result is a net-long or net-short position. This effectively
reveals sentiment.
The more net-long the speculators are, the more bullish they are
on gold. They won’t make these risky leveraged bets on this metal unless
they are convinced it is likely to continue surging. This tends to happen
near major toppings after big uplegs. The less net-long speculators are,
the more bearish they are on gold. They won’t bet heavily on gold upside
after this metal has long languished in corrections.
This first chart looks at these aggregate class positions in gold
futures over time. The always net-short commercial hedgers’ positions are
shown in yellow. Without them, gold futures trading wouldn’t exist.
The offsetting net-long large and small speculators are rendered in orange and
red. When the gold price is overlaid on these collective positions, it
becomes readily apparent they are a strong contrarian indicator.
Even though commercials are always net-short and speculators
always net-long during a secular bull, the
degree of these
bets is very revealing. As speculators get exceptionally bullish or
bearish on gold, their net-long exposure rises and falls accordingly. And
amazingly given futures’ traders well-deserved reputation as sophisticated
players, they nearly always make the wrong
bets near
gold-price extremes!
We’ll focus on the bearish side of this equation, low net-long
positions, since that is what is happening in gold today. In this weekly
chart running back to 2005, I highlighted major lows in speculator net-long
positions in blue. Futures traders as a herd were the most bearish on
gold at these junctures, not willing to make big upside bets because they were
so convinced the metal was doomed to keep spiraling lower.
The great value in this CoT gold-futures position data is unlocked
when directly compared to prevailing gold prices at the time. Note above
that every single time speculators’ net-long gold-futures positions fell to
major new lows, gold happened to be near a
major low itself.
Speculators were the least bullish, and therefore most bearish, right after
gold had already suffered through a major correction or consolidation.
Obviously the core mission in the markets is to buy low and sell
high, it is the only way to make money. If the gold-futures speculators
were living this truth as a group, their net-long positions would be the
highest near major gold lows and the lowest near major gold highs. But
they are doing the
opposite, succumbing to the irrational fear near major gold lows and the
exuberant hype near major gold highs.
Right after every major low in gold-futures speculators’ net-long
positions in this entire secular gold bull, goldsoon started surging in a major new rally or upleg! Collectively they haven’t
mastered their own greed and fear, just like stock traders. So the smart
bet to make near extremes is to do the exact opposite of what the specs are
doing. When their net longs are the lowest, gold is the most likely to
start surging.
Gold’s recent capitulation selloff that spawned their excessive
bearishness gradually began sliding on February 11th. It steadily
snowballed over the following week, climaxing on the 20th when the Federal
Reserve released its latest FOMC minutes. If you want to understand
exactly what news fed into this capitulation, our monthly newsletter analyzes
the chronology in depth. It was a 7-trading-day event.
About 6/10ths of that total gold selloff occurred in the first 6
trading days, with the final 4/10ths mushrooming on the 20th as the
capitulation climaxed. That was a Wednesday. But the weekly CoT
position report includes data as of each Tuesday, so the
19th was the closest we have to the selloff’s peak bearishness. And the
positions gold-futures speculators held that day already revealed staggering
levels of fear.
Large speculators held the long side of 196k contracts, and the
short side of 92k. This led to a net-long position of less than 104k
contracts, a staggering 50-month
low! Gold-futures speculators had not been that bearish since
December 2008 just after that once-in-a-century stock
panic. You may recall that gold got sucked into that maelstrom of
general-stock selling, failing to fulfill its expected safe-haven surge.
So gold bearishness was extreme in late 2008, with the gold price languishing at $776. Gold
not only couldn’t even catch a bid during the biggest and craziest fear spike
we’ll ever see in our lifetimes, it actually plunged 27.2% in just under 4
months! Nearly everyone, including sophisticated futures traders,
believed this meant gold’s secular bull was dead. So their net-long
bullish bets plunged to dismal lows.
Was their groupthink conventional wisdom correct? Was their
extreme bearishness justified? Heck no! That net-long low happened
just as gold was ready to start surging dramatically. Between that very
day and August 2011, gold’s secular bull would power 144% higher. Peak
bearishness in gold futures occurred at the worst possible time, a major
unsustainable low just before a major new upleg was born.
While that panic is the most extreme example of this bull, we see
this phenomenon at every major low in gold-futures speculators’ net-long
positions. They are the most bearish when gold is the most bullish, at
the best times to buy low. So it is very telling to see large specs’ net
longs at their worst level since the stock panic on February 19th, 2013.
Small specs’ net longs were just shy of a 49-month low of their own.
Throughout gold’s entire secular bull, one of the surest bets to
make was being the most bullish on gold when futures speculators were the most
bearish. And since gold’s bullish fundamentals are as strong as ever today in terms of global supply and demand,
smart contrarians are betting against the futures speculators today. The
recent gold capitulation may prove to be the best buying op since the stock
panic!
In addition to this net method of analyzing the weekly Commitments
of Traders report on gold-futures positions, there is another way to slice the
data. And it shows the same thing, that collectively futures speculators
are a powerful contrarian
indicator. It adds up the total long-side and short-side contracts
held by both classes of speculators, large and small. This method reveals
an equally extraordinary buying op.
Both classes of speculators’ total long and short positions in
gold futures are shown in green and red. In some ways this is an even
purer window into their collective sentiment, since the extremes aren’t masked
as in the aggregated net method. On the buy side, this contrarian
indicator combines two facets. When highs in total short positions coincide with lows in
longs, a major gold low is being carved before a rally.
Again I highlighted these episodes in blue, for easy comparison
with the gold-price data that reveals what happened next after futures
speculators became so bearish. Of course gold surged dramatically, with
major new uplegs being born soon after peak futures-trader
discouragement. The most extreme example was once again during 2008’s
insane stock panic. But amazingly last month far exceeded it on the short
side!
In the four weeks leading up to the eve of February 2013’s
gold-capitulation climax, the total short positions held by large and small
gold-futures speculators soared nearly 90%! This happened to be the
biggest surge in shorts, the most extreme flaring of bearishness, in 113 months. It was the largest ballooning of
speculator short positions in nearly a decade, since way back in September
2003.
Large and small speculators’ total short contracts surged over
125k on February 19th. After seeing this chart, I was of course curious
about how long it’s been since we’ve witnessed anything like that. It
turns out it was a163-month high. Speculators hadn’t been more
heavily short gold futures since
July 1999, at the tail end of this metal’s multi-decade secular bear!
February’s short peak was unparalleled in this secular bull.
And back then gold was only trading near $253, a far cry from
mid-February’s $1605 level as of that CoT report. So the amount of
capital exposed in shorting gold futures last month was almost certainly a
record, just staggering. We have never seen futures bearishness flare
faster to more extreme levels in this entire secular gold bull, despite
weathering many selloffs much sharper than February’s capitulation.
If gold’s near-future outlook is a direct inverse function of
futures speculators’ bearishness, which the historical data from this bull
clearly shows, then we’ve never seen this metal look more bullish than it did
in late February. That is truly amazing, considering gold has been
powering higher on balance since April 2001. Extreme bearishness is a
powerful contrarian indicator, the exact time to be the most bullish.
Having been trading this secular gold bull since those early days,
I’m perplexed that February’s events could have spawned such extreme
bearishness. Gold demand remains near record highs globally, while mine
production and recycling supplies are shrinking. Central banks are buying.
And despite the scare last month, the Fed’s hands are tied. It can’t stop
QE3 without sparking an economic catastrophe.
All this is also explained in depth in our new March
newsletter. The chain of events that drove February’s 7-trading-day gold
capitulation was really pretty mild compared to other big gold selloffs earlier
in its secular bull. This makes gold-futures speculators’ reaction look
even more irrational and emotional. They simply lost their nerve and
freaked out, despite no fundamental threats to gold emerging.
If gold demand was consistently falling over time, if gold
supplies were surging, then I would totally understand the desire to be
bearish. But since that isn’t happening, and since global investors
remain woefully underinvested in gold considering the extreme central-bank money creation globally, the wise bet to make is the contrarian one.
Gold-futures traders have always been wrong at peak bearishness.
The markets abhor sentiment extremes. Excessive fear and
excessive greed never last, the great sentiment pendulum soon starts swinging
in the opposite direction. Excessive fear only flares up near major lows,
just before major new uplegs start powering higher. This is because that
fear frightens all traders susceptible to it into selling right away, leaving
only buyers. The balance of power shifts to them.
So with gold-futures speculators’ net-long positions just at their
lowest since 2008’s stock panic, which preceded the biggest upleg of gold’s
secular bull, smart contrarians are betting against them. And with the
specs’ total short positions at extremes never before seen in this bull, peak
bearishness has to be past us. The rational thing to do in light of these
strong contrarian indicators is to buy gold aggressively.
And despite the gold bearishness spiking to silly levels in recent
weeks, that seen in gold stocks utterly dwarfs it. Just this week the
flagship HUI gold-stock index sunk to levels last seen 43 months ago in August
2009! Gold and silver were trading at $933 and $14 that day, a far cry
from this week’s $1575 and $29. This gross fundamental disconnect from
reality won’t last, gold stocks are an
über-contrarian play.
At Zeal we are battle-hardened veterans of this secular gold bull,
having traded its entire 12-year span to great success. All 637 stock
trades recommended in our newsletters since 2001 have averaged stellar
annualized realized gains of +33.9%! We achieved this and greatly
multiplied our subscribers’ wealth by being contrarians.
We are brave when others are afraid, buying low when futures traders freak out.
Last month’s irrational gold capitulation was analyzed in depth in
our acclaimed weekly and monthly subscription newsletters. They are written for speculators
and investors who are tired of being scared into selling low then seduced into
buying high. They will help you master your own emotions and trade
smarter, which will ultimately help you greatly multiply your wealth. Subscribe today and start thriving!
The bottom line is gold-futures speculators’ aggregate bets are a
powerful contrarian indicator. Despite their reputation of being
sophisticated, they struggle with the same greed and fear we all do. So
they wax the most bearish on gold right after major lows just before major
uplegs. This secular gold bull’s record of aggregate speculator
gold-futures positions as revealed in the weekly CoT reports make this
crystal-clear.
Thus prudent contrarians watch what the gold-futures speculators
are doing and make the opposite bets near CoT extremes. The more bearish
these specs get, the more bullish the outlook for gold actually becomes.
Succumbing to groupthink in the markets always leads to big losses.
Transcending it to think like a contrarian is the only way to consistently buy
low and sell high. Fight the herd and grow rich!
(www.zealllc.com)
From Trading Perspective.....
Recent price action on Jobs Report (8th March, 2013) was indeed revealing. Jobs numbers were massive beat coming in at +265k vs expectation of 165k and subsequent fall in unemployment rate from 7.9% to 7.7%. Gold tumbled immediately with release of data from 1578 to almost 1560
(Pls refer to below chart). However, within few minutes erased all losses (close to $20) and turned marginally green and closed flat at 1579. Weak set up in prices should have sustained losses because incoming data was very negative for gold.
Gold Price Movement on 8 March 2013 (When Jobs Data was released)
All of the above indicates that GOLD at current prices of around $1575 could be a great contrarian bet....
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