Been a goldbug since 1992. It was wonderful in 1994, then a disaster through much of the late 90's. Chatted during that time with some who are on this thread. The is the first post on this thread for me. Mining stocks I've owned since 1995 are now solidly in the black and I'm getting very nervous, based on prior Gold history. This is a person I enjoy & appreciate on realmoney.com. Take a peek, food for thought.
The Raging Battle in Gold
By Mike Norman
Special to TheStreet.com
08/27/2003 03:44 PM EDT
Click here for more stories by Mike Norman
Precious Metals BEARISH
Commercial shorts are increasing.
Producer selling and speculative buying has stepped up.
Economic factors are removing the rationale for higher prices.
Gold has surprised me by moving closer to its February high of nearly $391 an ounce, although I think it will be rough going as it nears $380. I had expected the metal to decline recently based on rising interest rates, improving global equity markets, a rebounding dollar, rising hedge sales and excessive bullish sentiment. So far, I'm wrong.
When I'm wrong, I want to try to find out why. This has led me once again to take a look at open interest (total open long and short futures positions). In the Commitment of Traders report by the Commodity Futures Trading Commission, for the week ended Aug. 19, commercials were short 174,211 contracts. That's a record for commercial shorts and it was an increase of 23,195 contracts from the week before.
Commercial Selling
Commercials continue to sell, pushing their average short position this year to 137,291 contracts, compared with 110,917 contracts for all of 2002 -- a 24% rise year over year. And if you look at the short positions since May -- the time that gold prices have been elevated -- it's been around 143,000.
However, on the speculator side, another picture emerges, which the bulls could use to make their case. Large speculative long positions hit 104,223 contracts in the period ended Aug. 19. That's a record, too. The average total large spec long position this year has been 70,532 contracts. Last year it was 54,395. Large speculators have increased buying by 30%.
Small speculators have maintained an average total open long position of 51,635 contracts this year compared with 46,148 last year. Small specs have increased their longs, but only by about 12%. They haven't been as aggressive as the large specs. (Typically, large specs are managed futures funds.)
The combined (large and small specs) average speculative long position this year is 122,167 contracts, an increase of about 20%, which compares with a 24% increase in commercial short positions. Commercials have been more aggressive on the short side than specs have been on the long side.
Recent Long Positions Increase
The most interesting thing about the long position increases is that they've mostly occurred recently, i.e., in the last four months when gold prices have been elevated. Speculators were not aggressive buyers in April, for example, when the price dipped to $320. Rather, most of the rise in long positions has occurred as gold advanced from $350 to $370. I'm not saying this strategy can't work; it can if you have enough money. Clearly, if we're in the context of a sustained move higher in gold, $370 an ounce five years from now will seem ridiculously cheap. But I continue to have my doubts.
I've been stressing that gold demand attributable to investment was tiny compared with industrial buying. (On the latter, jewelry is the primary factor.) Last year, in the midst of one of the worst global stock market periods on record, investment demand for gold was a mere 400 tons, with 95 tons coming from Japan and only about 30 tons from the U.S. In contrast, about 2,700 tons of total demand emanated from the jewelry industry last year.
This year is a completely different environment. Global equity markets are rising and the dollar -- which fell steadily in 2002 -- is now rebounding. Interest rates have stopped their downtrend, and economies around the world, including Japan, are stabilizing and recovering.
In the meantime, we're seeing both stepped-up producer selling and speculative buying. A confrontation is building and the record level of positions in the gold market suggests the eventual resolution of this debate will bring a powerful, if not violent reaction.
In the past, commercials have dominated these confrontations, winning the battle to determine market direction. Commercials have staying power, not only because they're better capitalized, but also because they're essentially "flat" and therefore very hard to squeeze. Remember: If they sell gold short, they own the physical metal at the same time. If they need to deliver, they have it; in fact, that's their intention. And with huge reserves, either in the ground or in vaults, they can sell for a long time without feeling any pain.
Recent Long Positions Increase
The most interesting thing about the long position increases is that they've mostly occurred recently, i.e., in the last four months when gold prices have been elevated. Speculators were not aggressive buyers in April, for example, when the price dipped to $320. Rather, most of the rise in long positions has occurred as gold advanced from $350 to $370. I'm not saying this strategy can't work; it can if you have enough money. Clearly, if we're in the context of a sustained move higher in gold, $370 an ounce five years from now will seem ridiculously cheap. But I continue to have my doubts.
I've been stressing that gold demand attributable to investment was tiny compared with industrial buying. (On the latter, jewelry is the primary factor.) Last year, in the midst of one of the worst global stock market periods on record, investment demand for gold was a mere 400 tons, with 95 tons coming from Japan and only about 30 tons from the U.S. In contrast, about 2,700 tons of total demand emanated from the jewelry industry last year.
This year is a completely different environment. Global equity markets are rising and the dollar -- which fell steadily in 2002 -- is now rebounding. Interest rates have stopped their downtrend, and economies around the world, including Japan, are stabilizing and recovering.
In the meantime, we're seeing both stepped-up producer selling and speculative buying. A confrontation is building and the record level of positions in the gold market suggests the eventual resolution of this debate will bring a powerful, if not violent reaction.
In the past, commercials have dominated these confrontations, winning the battle to determine market direction. Commercials have staying power, not only because they're better capitalized, but also because they're essentially "flat" and therefore very hard to squeeze. Remember: If they sell gold short, they own the physical metal at the same time. If they need to deliver, they have it; in fact, that's their intention. And with huge reserves, either in the ground or in vaults, they can sell for a long time without feeling any pain.
In contrast, speculators need a constant flow of money and new buyers to maintain rising prices. In addition, there has to be a realistic investment rationale for the buying, otherwise, eventually, prices fall.
With equity prices and interest rates rising, economic conditions improving and currency trends turning less favorable, it would appear that some of the rationale is dissipating, yet, speculators climb into gold in record numbers.
If there is a flaw in my analysis, it's only that I haven't calculated for the number of investors flocking to the gold market. This would be an analytical flaw equivalent to underestimating the enthusiasm for dot-coms in the late 90s. Many, if not all, of those stocks went beyond all rational justification on the pure flow of money. Could this not happen to gold? Perhaps, but for now I remain content to bet against it. And remember what became of those dot-coms?
Henry |
