Looking at this week’s Commitments of Traders Report, there are significant changes in Japanese yen, gold and Canadian dollar net positions. Looking at our implied measure of US dollar positioning (the inverse of net positions in other major currencies), speculators increased their bets on the US dollar for the fifth week in a row. The significant drop in both Japanese yen and gold net positions suggests that speculators are increasingly wary of the Federal Reserve. As both US growth and inflation data continue to accelerate, the Fed is increasingly likely to raise rates in the future. As a result, negative or zero yielding assets such as the yen and gold are selling off while the US dollar strengthens.
Looking at extremes in positioning, net positions in the US dollar, euro, and our implied measure of US dollar positioning are all at extremes based on trailing 12-month averages. This week, short positions in gold are at a bearish extreme, while the Canadian dollar is no longer above our threshold. The Swiss franc remains at a bearish extreme based on trailing 36-month averages. Swiss franc net positions have been at a bearish extreme now for ten weeks in a row.
The purpose of this weekly report is to track how the speculator community is positioned across various major currencies and commodities. When net long positions become crowded in either direction, we flag extended positioning as a risk. Crowded positions do not suggest an imminent reversal, but should be considered as a significant risk factor when investing in the same direction as the crowd. This is shown below:
CFTC COT speculator positions (futures & options combined) – July 17, 2018
Notable extremes, significant changes in weekly positions, and large net positions as a proportion of open interest are highlighted above. Extremes in net positions are highlighted when speculator positioning is more than two standard deviations above trailing 1-year and 3-year averages. Weekly changes are highlighted when they are significant as a proportion of open interest. Finally, net positions as a proportion of outstanding interest are highlighted when they are large relative to historical averages. 1-year and 3-year z-scores are visually represented below:
1-year and 3-year z-scores based on net speculator positions
As US growth and inflation data simultaneously accelerate, gold speculators are losing faith in the precious metal. This is especially the case as the Fed is signalling more rate hikes this year, while growth outside the United States slows sequentially. While speculators increased their bets on gold over the first quarter of 2018, they have been unwinding their long positions since that time.
The current net long position in gold (+38,891 futures and options contracts) is the lowest since December 2015. Gold positioning also looks stretched when comparing the number of long contracts to open interest (5.1%). Based on this measure, speculator positioning in gold is also at lows last seen since December 2015. Speculators with a good memory will recall that December 2015 marked the long-term bottom for the precious metal following a 4-year bear market that started in 2012.
While sentiment is one good reason to start buying today, our quantitative indicators continue to suggest that gold is in a bearish trend. This being said, we expect gold to strengthen later this year. This is especially the case as we forecast that both US growth and inflation will roll over and start decelerating in the second half of this year. For now, all recent economic data (looking at figures from June) point to accelerating growth and inflation. Once this backdrop changes, expect gold to enter a bullish trend and for the precious metal to start strengthening.