|
|
|
|
|
|
|
|
 |
The Potential for a New Leg in Precious Metals October 28, 2006
One of the most-requested research topics I get is for that of metals. There is no other commodity that triggers as much interest as gold, and those who follow the market have a near-obsession with its every movement.
I don't often write about precious metals, but there is something brewing there that is unusual.
Recently the Japanese Yen has perked up against the dollar, something that makes gold fans sit up and take notice. Yen and gold have enjoyed a cozy relationship over the years...since 1979, monthly changes in the two markets have exhibited such a close positive correlation that there is less than a 1% chance that such a thing would be due to chance.
Over the past six months, the two markets have moved in near lockstep. The correlation between the 5-day rate of change in Yen futures and the 5-day rate of change in gold futures has been 0.6 (out of a scale of -1 to +1). That's so high that once again there's less than a 1% chance of it being due to chance alone.
So if we're going to look at gold, then perhaps it might pay to look at the Yen as well.
Speculators Heavily Short the Yen
Over the past few weeks, we've been seeing large speculators in Yen futures dramatically increase their bets against a rise in that currency.
Large speculators are those traders who were holding more than 400 Yen futures contracts as of last Tuesday, and who haven't identified themselves as using the futures markets to hedge their day-to-day business risk. Typically that means we're talking about trend-following Commodity Trading Advisors, which are hedge fund-like operators who place directional bets on the currency.
It's gotten to the point now that these speculators' net short position is more than twice as large as the previous all-time record set in late 2005.
Watching extremes in these positions has been a fairly good contrary indicator - when large specs got too long, the Yen tended to decline; when they got overly short, the Yen rallied. It hasn't been perfect, but it has been consistent enough to be useful.
So if these speculators begin to buy Yen to cover their excessively large short positions, and the Yen rallies in part due to that demand, then based on the positive correlation between the Yen and gold, we might expect gold to rally as well.
Traders in Metals Futures Near Multi-Year Extreme
Further supporting a potential new leg up in precious metals can be found in the positions of large speculators in gold and silver futures. For those markets, large speculators are determined to be those traders holding more than 200 contracts of gold futures or 150 contracts of silver futures as of the reporting date (and, again, they are not using futures to hedge their day-to-day business operations).
The chart below shows the percentage of long contracts held by large speculators for each metal.
We can see from the chart that recently these traders were holding a little more than 30% of long gold futures and under 30% of long silver futures – both about equal to multi-year lows.
The previous two times both percentages had reached such low levels, the PHLX Gold / Silver Index (XAU) enjoyed multi-month runs higher. Perhaps the same will be in store this time around if the XAU can bust out of the triangle formation that it has been forming since the spring.
Rydex Traders Not Yet Jumping In
One other piece of data helping to flesh out sentiment towards precious metals can be found among the Rydex mutual fund asset data that we post to the site each day.
When traders in the Rydex family of funds shift a large amount of their funds to one sector or another, it has proved to be a consistently effective contrary indicator.
Below is the chart we post for the Rydex Precious Metals Fund. The middle pane represents the actual assets in the fund (surrounded by Bollinger Bands to help us determine if the current level is extreme or not). The bottom pane shows what percentage of total assets in all the sector funds that Rydex offers are currently situated in Precious Metals.
While traders have begun moving funds back into Precious Metals as gold and silver have rebounded a bit, there is plenty of room to go before we could consider these traders to be focused too heavily in the sector. Home | Commentary | Indicators | Models | Sectors | COT | Subscribe | About Us
© 2001-2007 Sundial Capital Research, Inc. All rights reserved. Disclaimer. sentimenTrader.com is a trademark of Sundial Capital Research, Inc. Sundial Capital Research, Inc. PO Box 341 St Michael, MN 55376 e-mail: admin@sentimentrader.com |
|
|
 |
|
|
