Gold Weekly: Expect A Rebound Into Year-End

REBOUND, Chuck Hipsher (Saatchi Art)


Welcome to my Gold Weekly.

In this report, I wish to discuss mainly my views about the gold market through the GraniteShares Gold Trust ETF (BAR). BAR is directly impacted by the vagaries of gold spot prices because the fund physically holds gold bars in a London vault in the custody of ICBC Standard Bank.

To do so, I analyse the recent changes in speculative positions on the Comex (based on the CFTC) and ETF holdings (based on FastMarkets’ estimates) in a bid to draw some interpretations about investor and speculator behavior. Then, I discuss my global macro view and the implications for monetary demand for gold. I conclude the report by sharing my trading positioning.

Speculative positions on the Comex

The CFTC statistics are public and free. The CFTC publishes its Commitment of Traders report (COTR) every Friday, which covers data from the week ending the previous Tuesday. In this COTR, I analyze the speculative positioning, that is, the positions held by the speculative community, called “non-commercials” in the legacy COTR, which tracks data from 1986.

It is important to note that the changes in speculative positioning in the gold futures contracts do not involve physical flows because it is very uncommon for speculators to take delivery of physical on the futures contracts that they trade. Due to the use of leverage by speculators, the changes in speculative positions in gold futures contracts tend to be much greater than the changes in other components of gold demand like ETFs or jewellery.

As a result, the impact on gold spot prices tends to be relatively more important and volatile, which, in turn, affect the value of BAR because the latter physically holds the metal in vaults in London and therefore, have a direct exposure to spot gold prices.

Gold ETF positions

The data about gold ETF holdings are from FastMarkets, an independent metals agency which tracks ETF holdings across the precious metals complex. FastMarkets tracks on a daily basis a total of 21 gold ETFs, which represent the majority of total gold ETF holdings. The largest gold ETFs tracked by FastMarkets are the SPDR® Gold Shares (NYSEARCA:GLD), whose holdings represent nearly 40% of total gold ETF holdings, and the iShares Gold Trust (IAU), whose holdings represent roughly 15% of total gold ETF holdings.

Speculative positioning

Source: CFTC

According to the latest Commitment of Traders report (COTR) provided by the CFTC, non-commercials lifted slightly their net long position over the latest reporting period of October 30-November 6.

The net spec length in Comex gold increased by 18 tonnes from 41 tonnes (3% of open interest) on October 30 to 59 tonnes (4% of open interest) on November 6. This was mainly driven by short-covering (17 tonnes).

The net spec length has increased by 178 tonnes from its low of -119 tonnes on October 9. While this suggests a positive swing in sentiment, there is still plenty of room for long accumulation/short-covering in the sense that the net spec length in Comex gold remains extremely small judging by historical standards.

Last year, the net spec length averaged 493 tonnes. So far this year, it has averaged only 294 tonnes.

Bottom line: I expect speculators to continue to boost their net long exposure to Comex gold into year-end. This should produce strong upward pressure on Comex spot gold prices, which in turn would lift significantly the value of the GraniteShares Gold Trust ETF.

Investment positioning

Source: FastMarkets

ETF investors cut a small 2 tonnes of their gold holdings over the latest reporting period of November 2-9, according to FastMarkets’ estimates. This was principally due to outflows from GLD (4 tonnes).

ETF investors are still net buyers of gold to the tune of 21 tonnes over the past month. As October lived up to its reputation of being the most volatile month for US equities, some investors boosted their long exposure to safe-haven assets like gold.

That said, the pace of gold ETF buying has been relatively contained because investors remain fairly bullish on US equities, seeing any dip as a buying opportunity.

This prevailing mood could change once investors realize that the gradual tightening of US financial conditions caused by the Fed tightening cycle will result inevitably in a higher level of volatility in risk assets, prompting them to buy more gold as a hedge.

Bottom line: I expect gold ETF inflows to become increasingly positive in the course of 2019 because investors may need more haven assets like gold in their portfolios to navigate the more volatile environment caused by the Fed tightening cycle.

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Trading positioning

Although the Fed remained on hold on November 8, the macro environment for gold has turned less constructive since then, evident in the notable rise in the dollar, while US real rates have remained at the upper end of their range. Perhaps investors interpreted the latest monetary policy statement as more hawkish than expected because the Fed did not acknowledge the sell-off in risk assets in October. Against this backdrop, Comex gold spot prices have come under downward pressure as a result of spec/investor selling.

Nevertheless, I view the recent appreciation in the dollar and US real rates as transient because the outcome of the US midterm elections on November 6 (i.e., divided Congress) has curbed expectations for further fiscal stimulus and has raised the likelihood of a gridlocked government, which is therefore dollar-negative. This should lead to renewed downward pressure on the dollar and US real rates, prompting speculators/investors to jump back in gold.

To play a likely rally in spot gold prices into year-end, I have a long position in the GraniteShares Gold Trust ETF.

Source: Seeking Alpha

From a technical viewpoint, the balance of risks to BAR is skewed to the downside because momentum has turned negative and BAR is below its 20 daily moving average.

However, I continue to expect the 2018 low of $117 to hold, seeing the current drop as a buying opportunity rather than a signal to exit my position.

BAR – GraniteShares – Review

BAR is directly impacted by the vagaries of gold spot prices because the Fund physically holds gold bars in a London vault and custodied by ICBC Standard Bank. The investment objective of the Fund is to replicate the performance of the price of gold, less trust expenses (0.20%), according to BAR’s prospectus.

The physically-backed methodology prevents investors from getting hurt by the contango structure of the gold market, contrary to ETFs using futures contracts.

Also, the structure of a grantor trust protects investors since trustees cannot lend the gold bars.

BAR provides exposure which is identical to established competitors like GLD and IAU, which are nevertheless much more costly to hold over a long period of time. Indeed, BAR offers an expense ratio of just 0.20% while GLD and IAU have an expense ratio of 0.25% and 0.50%, respectively.

As of November 9, BAR traded at a slight discount of $0.13 per share, compared with $0.11 per share to its net asset value. I expect any deviation from the net asset value to narrow on the back of arbitrage opportunities, which should benefit BAR investors.

BAR’s average spread (over the past 60 trading days) is 0.02%, which is lower than that of its competitor IAU, at 0.09%, or SPDR Gold Minishares Trust (GLDM), at 0.08%.

As a result, BAR offers the lowest total cost of ownership (expense ratio + spread) among gold ETFs.

BAR’s average daily volume (over the past 45 trading days) is ~$2 million, which is much lower than that of IAU, at ~$126 million.

As of November 9, 2018, BAR’s assets under management totalled $303 million, with 2.5 million shares. BAR’s gold holdings were at 7.8 tonnes. In contrast, IAU’s assets under management amounted to $10.295 billion, with 983.5 million shares. IAU’s gold holdings were at around 272 tonnes.

For the sake of transparency, I will update my trading activity on my Twitter account.

Final note

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Disclosure: I am/we are long BAR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.