Monday, September 27, 2010

Gold's Net Speculative Long Positions Dropped for the First Time in 7 Weeks

Crude oil price changed little in Asian session after Friday's rally but the near term outlook remained firm as the dollar weakened. Current trading at 76.6, the benchmark WTI contract stayed in the middle of the 70-80 trading range. The chance of going higher and lower is balanced for today but it's unlikely for a break out of the range. Gold price moves narrowly around 1300. While the macroeconomic backdrop is favorable for further gains, a pullback on profit taking cannot be ruled out as the metal has advanced for 7 out of the past 8 weeks.

Dollar's weakness is a main theme sending commodities higher in recent weeks. The USD Index plunged below 80 for the first time since March last week and has dropped -10% from June's peak. USD should continue to be pressured as long as speculations on Fed's additional QE measures remain intact. Today in Asia, EURUSD soared to as high as 1.3494 before retreating. Investors trimmed investments on the euro as Ireland will disclose the final expenses of bailing out Anglo Irish Bank Corp. later this week. In fact, the euro fell against 15 out of 16 currencies as concerns about banking crisis in the Eurozone resurfaced. The euro's weakness against dollar is only mild in comparison with others. USDJPY changed little at 84 although the government may implement a stimulus plan of up to 4.6 trillion yen to boost recovery. Meanwhile the BOJ Governor Masaaki Shirakawa said the central bank is 'ready to implement appropriate action in a timely manner if judged necessary'. A deflationary Japanese economy and the government's currency intervention and stimulus policy are theoretically negative for Japanese yen. Yet, strength in the currency indicates that the effects of a unilateral intervention are limited.

We have a light calendar today. Japan's corporate service price contracted -1.1% in August, slightly better than expectations of -1.2% and unchanged from July, while trade surplus stayed unchanged at +0.59 trillion yen in August from a month ago. The money supply (M3) in the Euro zone probably grew +0.3% y/y in August, following a +0.2% increase in July.
Commitments of Traders:

Speculators showed mixed expectations on the energy complex as they were more bullish on fuels than crude oil. Net length for crude oil declined -4 437 to 43 900 contracts as the Enbridge pipeline 6A resumed operations earlier than market expectations. Net lengths for heating oil and gasoline increased, by 7 083 and 4 367, to 17 891 and 35 232 respectively. Net short for natural gas rose for a 7th week even though price has fluctuated around the $4 level. Traders lacked incentives to trade the futures as we saw both long and short positions declined during the week but the drop in the former was 6 times higher. The fundamental outlook was largely unchanged with gas supply remaining sufficient and hurricanes failing to disrupt production activities.

Performance was also discordant in the precious metal complex. Net length for gold slipped for the first in 7 weeks although price has set new record highs. Some traders entered short positions as they viewed the rally overstressed. While some market participants began to worry about a gold price bubble, gold has only set a record in USD terms but remained below June's levels in terms of many other currencies. Moreover, it's far from the peak when calculated in real terms. We believe gold's long term uptrend remains intact if the low rate environment persists. Net lengths for silver and platinum increased further while that for palladium dropped in concert with price decline.

Let's go to the charts on Non-Commercial Net Positions

The "Super Cycle" in Gold and How It Will Affect Your Pocketbook in 2010


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