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Monday, 23rd March 2015

It looks like gold has bottomed  

Three things support this conclusion. First, the Commitment of Traders report for March 20/15 tells us that the Managed Money crowd (hedge funds) have pushed their net short position to the same extremes as they did at the November low in gold. Since January 27/15, these traders have increased their shorts from 19,873 contracts to 78,623 while reducing their longs from 173,110 to 97,847. This huge swing in fast money positioning suggests to us that gold has double bottomed. The evidence suggests they are now starting to cover. On the other side of this trade, we have seen the biggest 8-week reduction in the Commercial net short position (150k contracts) since September 9/08. 

Second, the gold stocks have significantly outperformed gold in this last dip in the gold price. This month, gold broke decisively below its December lows but the GDX (representing the larger gold producers) did not. This kind of divergence, with gold stocks bottoming first, has reliably marked lows in the past. We didn't get this divergence between gold and the mining shares back in November, when gold and gold stocks bottomed together, but we did get it at the end of the last gold bear market in early 2001 when the mining stocks bottomed first in November of 2000 and gold then bottomed in the first quarter of 2001.

Third, the macro environment has shifted in favor of gold. US economic data has turned down in the most recent quarter and the Fed acknowledged this fact in its March 18/15 statement by substantially reducing its forward guidance on the US economy and softening its commitment to interest rate hikes in the near term. The mark down in US economic prospects was actually quite shocking, as they no longer expect GDP growth above three percent over the next several years.

How strongly will gold bounce? That depends on other asset markets and the US dollar. If the US stock market corrects along with the dollar, the recovery in gold and gold stocks should be fierce, fueled initially by short covering. If there is no near term correction in these other markets, gold and gold stocks may find that the move up is slow and labored but, in our view, up nonetheless.