MANY analysts relate the net long/short position in contracts betting on the US Dollar to be an influence on the gold price, says Julian Phillips at Gold Forecaster.
To a small extent this may be true, but not, in our opinion, to an extent that actually affects the gold price.
A short/long position on Comex for instance can be used in a multitude
of major and minor transactions to hedge the original Dollar positions
so as to remove the risk of an exchange rate change. This policy has
nothing to do with the future exchange rate of the Dollar against any
currency or against the move of gold against the Dollar.
A much smaller but considerably more active market is that involving
speculators and traders who do view the potential for a change in the
exchange rate of the Dollar against any currency. It is this market that
influences day-to-day prices, but not in a way that commentators often
think. Comex is a financial market where as much as 95% of all contracts
are closed out before the contract matures.
Turning to the real net long/short positions in the Dollar, this number
includes all those where delivery will not take place as well as those
that do. This muddies the water somewhat and reduces this figure to one
defining expectations, not necessarily realities.
The section of this market defined as the Commercial positions reflect
those positions that are conducted by the more savvy professional
investors. As the Dollar turned higher in recent weeks, these investors
closed more and more short positions that would have cost them dearly as
the Dollar rose against all currencies. The expectations were that the
Dollar was set to rise and continue to rise, justifying long positions,
not short, in the Dollar.
As you can see in the chart here the Dollar's future according to the
Technical picture is for it to rise by another 20% against all
currencies. But it must be said that this figure is a 'target' and often
not a future reality. Even the Fed has made it clear it does not want
to see a stronger Dollar, as this will damage its exports and increase
imports, hurting the recovery in the US We believe they are already
taking action to hold the Dollar back.
As deflationary expectations have risen worldwide, for the last six
months, alongside a rising equity market, we have seen a switch from
overseas investments to Dollar assets by the 'carry trade' (borrowing in
Dollars to lend in other countries) as they closed their positions. The
rising Dollar index has shown this. Gold has been made to fall back to
its lows as a result until now.
It's an expression of fear, not of hope when this happens, because of
the rising expectation of deflation prompting a turning to 'safe'
positions in the most liquid and strong currencies. Treasuries and cash
are believed to be the safest of places when market falls are expected.
It may be there will be a major sell-off in Treasuries when interest
rates start to rise and bond prices respond by falling. Then cash in
Dollars becomes the only currency haven in most investor's minds.
It is a matter of history that US investors/traders/speculators take
long positions in the US Dollar and may well either stay out of gold and
the Euro, or short them both. This ignores gold's fundamentals which
show Asia and the Middle East absorbing around 80% of the world's gold
supplies annually and have considerably reduced western market liquidity
in gold, a factor that may well leave Asia in control of future
pricing.
It is a surprise that this physical dominance of the gold market by
Asia has not already translated into Asia's control of the gold price.
That time is coming fast as gold liquidity has reduced to critical
levels in the developed world. It may be here already.
But until that happens developed world markets will exert this 'strong
Dollar, weak gold' positioning. As the Dollar turned up, there was a
global rush into US treasuries and into the US Dollar.
Until August, the largest of the largest traders of gold and silver
futures continued to report very low net short positions, right near the
lowest net short positions they have had in years. The expectations are
therefore that the Dollar has peaked and will either consolidate around
these levels (with the help of the Fed and Germany) or will fall.
But from August until now short positions in gold doubled until this
last week when they were hastily reduced as the gold price leapt from
$1141 to $1218 per ounce and after a consolidation from $1200 and the
current rise to $1230.
Following this traditional relationship, it is likely that developed
world investors will go long of gold as the Dollar retreats. Why has
this change happened now?
The dramatic fall in the oil price has also led to a vast quantity of
US Dollars not being used now and will return back to the United States.
This will have a heavy affect. If the fear persists and deflation
becomes the new global reality, then the Dollar as a national currency,
faced by an expanding Yuan, loses a great deal of its appeal and gold,
the non-national currency, takes on a far greater sheen.
As it is still close to its low, since 2009, it becomes an even more
attractive haven. It may be that we are seeing this turn right now.
