In volatility terms July was another unremarkable month – we’re back to the Great Moderation again. According to analysts at S&P Dow Jones, “US equity risk actually declined, market volatility fell, and dispersion increased. “ The table below tells the story of this renewed moderation.
Given the tedium of equity market volatility, I find the gold markets much more interesting as a measure of market concerns. If investors are secretly worried about Trump and a Trade War, none of these concerns are showing up in the precious metals market. Gold is threatening to flatline, again. In fact the gold market had dropped almost 8% since April, which coincided with surging momentum in the U.S. Dollar Index. Evidence of this retreat from fear is all over the place. Commerzbank for instance has reported outflows of gold from exchange-traded-fund vaults which seem to have continued into early August. “We envisage significantly higher gold prices by year’s end, though for this to happen, the ETF outflows would also have to end, which has not been the case so far,” Commerzbank says. “Following outflows of over 29 tonnes in July, holdings have already been reduced by more than eight tonnes in the first days of August.”
This bearish view on gold is reflected in futures markets as well. Fund managers increased their net bearish positioning in gold futures, according to the most recent weekly data from the Commodity Futures Trading Commission. The CFTC’s “disaggregated” report showed that managed-money accounts upped their net-short position in gold futures to 36,422 contracts from 26,449 the week before. Total shorts rose by 12,447 lots and outpaced the fresh buying, with the latter reflected by an increase of 2,474 gross longs.
But not everyone thinks that gold is doomed. A few analysts reckon the bearishness is overdone. One of them is Bernard Dahdah of Natixis who back in late June suggested we should expect material weakness in the U.S. dollar in September, which should support gold prices through to 2019. “We see the dollar remaining firm until September, at which point the ECB is expected to announce monetary policy normalization. The dollar could even remain stronger into 2019 if the euro is penalized by uncertainties caused by Italy or Brexit,” he said in his June report. “That being said, in our central scenario we see downward pressure on the dollar by the end of 2018 as other central banks begin to normalize their monetary policy.” The French bank sees gold trading in a range between $1,200 and $1,450 an ounce next year. The Natixis analyst isn’t alone. Metal Bulletin precious metals analyst Boris Mikanikrezai reckons at the “present juncture, sentiment in the gold market looks excessively bearish, which is unsustainable”. He reckons the bears have over stretched themselves, with a big snapback reversal imminent. “In my view, bears are playing with fire at this juncture, and some of them are on the verge to get burnt,” according to Mikanikrezai.
Maybe the gold bulls are right. But looking at the technicals in the chart above, it does seem like we’ll have a solid test of the $1200 barrier fairly soon. At which point I have to say I’d be a fairly aggressive buyer of leveraged gold miners that pay a dividend.