Gold Rising? No — the Dollar’s Falling
Alasdair Macleod

By conventional measures on Comex, gold is now vulnerable to a correction. But there’s growing evidence that there are other forces at play

The last data point for the net long position for hedge funds was 17 September (COT report) due to be updated on Friday. Since then, open interest has increased by 28,256 contracts on preliminary figures for yesterday (Tuesday). That implies that this category of trader (managed money) is net long of about 240,000 contracts and therefore highly vulnerable to a bear raid by the swaps (bullion bank traders and market makers). And note how the rise in their net position is in lockstep with the price. But there is other evidence which we cannot ignore and is a new factor in the market.

What are the hedge funds selling to buy gold futures? This is my next chart and it is scary:

This death cross on the USD TWI, when the price is below falling moving averages with the 55-day falling below the 250-day and their decline accelerating explains why hedge funds are throwing caution to winds buying gold futures, seemingly at any price.

Another bizarre market reaction has been to China’s PBOC monetary stimulation, which in the grand scheme is not really significant, cutting key interest rates yesterday by 0.2% to shore up its ailing property market and to support the economy. The POBC seems to have caught Keynesian ‘flu. But instead of the yuan drifting lower as the interest differential with US rates increased, the yuan has soared to the highest level since May 2023.

And then we see commodity prices beginning to move higher. Copper, oil, and others are trending higher together. The chart below shows how individual commodity prices have risen over just one week!

The common factor is that the dollar is falling measured by commodity values. Clearly, markets are now reading an inflationary outcome from the Fed’s 50 basis point cut in the Fed Funds Rate last week. Whatever Jay Powell says publicly about a robust economy, off the record it appears that supporting the economy is now a higher priority than tackling inflation.

By way of confirmation, China indeed has a problem which is rarely mentioned. Export sales are under pressure. Why? It’s because major export markets are in recession. The fact that China has decided to act probably confirms the global recessionary fears informing US monetary policy.

So gold is just the canary signalling the early stages of not just a dollar problem, but accompanying factors are likely leading to the end of its reign as a fiat currency. It is the safest of safe havens in these troubled times, and overbought futures are hardly relevant.

 

 

Alasdair became a stockbroker in 1970 and a Member of the London Stock Exchange in 1974. His experience encompasses equity and bond markets, fund management, corporate finance and investment strategy. After 27 years in the City, Alasdair moved to Guernsey. He worked as a consultant at many offshore institutions and was an Executive Director at an offshore bank in Guernsey and Jersey.

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