- US market participants friendly to gold, but are observers rather than active players
- Gains led by non-traditional players
- More interest in gold now, and questions about it, than for the past 2 years
- Viewed as the final financial market hedge
- Vol no longer cheap, risk reversals up to 2.5 for calls, matching the 2011 high
- For now the runup looks overdone, but buy dips
I spent last week in the US, and the topic of conversation was gold, gold and more gold - from current clients, clients that haven't been active since the tail end of the bull run, clients of my FX/equity/rates colleagues, and potential clients. In other words, everyone wanted to talk about gold. I haven't seen such interest in years.
Why the interest? The short version
Gold is currently viewed as the final financial market hedge. US data is deteriorating and the Fed won't be raising rates any time soon; China is set to contract further; CNY devaluation will continue and encourage a move into gold; negative interest rates in Europe, Switzerland and Japan make gold relatively more attractive; real yields are falling; nominal yields remain low; gold positioning is light, gross shorts still relatively high.
Given all that, there's a lot of buyers, right? Wrong: many expressed the view that they'd prefer to wait, miss the early rally and buy into momentum later on.
Why the hesitancy? The short version
Those who are hesitant to jump in argue that, technically, this is still a bear market for gold; that the US isn't going into recession, indeed raised rates in December, and the potential for a reversal of that hike is very low; that gold (ETF) buyers have become more fickle in recent years; that physical demand is tame; that there's no inflation and little potential for it; that gold couldn't hold onto any upside moves in 2015; that in a commodity bear market, the recent rally only makes gold look very expensive; that the gold/oil ratio is too high.
These are all reasonable arguments, but the factors pushing investors into gold are considerably stronger. The 2015 price bursts were predominantly rooted in positioning, with shorts very extended and net length at low-single-digit levels. The current rally hasn't been driven by short-covering, and in fact gross shorts still remain quite high, 13.9 moz as of Feb 2, down from a high of 19.2 moz in early December but very elevated compared to the weekly average of 6.2 moz during 2009-2011. Also net long positioning at 8.9moz is far from frothy.
Who has been buying gold? Observe the changing trends
The main buyers of gold, at least until the break of its 200-day moving average at $1130 last Wednesday, were not traditional commodity players. Rather, it was the wider macro community, which has predominantly expressed its views through long-dated (6m+) options or GLD options. Traditional players became much more active upon the break of the 200 dma and the psychologically important $1150 level. Repeatedly in meetings last week we encountered would-be participants who were happy to miss out on the early stages of the rally and buy into momentum later on. ETF inflows have been very large, 3.4 moz year-to-date. To put this into context ETF holders were net sellers last year totalling 4.2 moz. Also worth noting here is that the ETF buying hasn't just been GLD led – the GLD has seen inflows of 1.96 moz and the rest has emanated from European contracts.
On a much smaller scale, we've seen longer-term holders buying back calls as well as private banks buying physical gold and also returning interest in fully allocated, segregated gold - the ultimate safe-haven trade. None of these have been in tremendous size, but what matters is the trend change. Currently the gold market is littered with changing trends – factors on their own which would not raise must attention, but put them together and they add up to a considerable alteration in market dynamics. That makes me sit up and pay attention.
Despite a contained rally in January, February's move looks excessive
