When different but no less respected sources start saying the same thing one feels duty bound to at least listen to what they say. On the same day, both Standard Bank and UBS had both cast doubt on the strength of the current gold rally and suggested investors should take profits, at least for now. Neither party is looking at fundamentals in their assessment but rather at the relative positions of speculative buyers and sellers.
In an article by John Reade, an analyst at UBS, he discussed the number of “net long” positions held by speculators reached 29.02m an ounce last week, a record high. Net long positions are simply those long positions in excess of any short positions the investor, fund or portfolio may hold. Long positions are purchased in expectation of the market going up, short positions sold in anticipation of the market going down. So wouldn’t one expect an excess of short positions to suggest the market is going to come off? Well yes and no. In reality, any market bubble gets to a peak at which point the largest number of people are holding the largest number of positions expecting the market to continue to rise. That can be measured by longs and shorts on the futures markets and historically when the volume of longs get as high as they are now it has been just before a correction. Comex contracts saw a jump last week of 6.4m ounces in net long contracts, a rare occurrence and in the past, a forerunner to a fall in the market, typically of around 5%.
According to Walter de Wet at Standard Bank, CFTC data suggests net speculative long positions have risen to 161 metric tons from week to week, the largest weekly rise in two years. At the same time, he reports that net long speculative positions have risen to 40% as a percentage of open interest (open interest is the total number of futures contracts or option contracts that have not yet been exercised, expired or fulfilled by delivery i.e. they are still open) also the highest in more than two years – both could indicate a sizable correction for gold is due.
So what do they mean by sizable? Typically in the region of 5% so we could see prices back to $950-965/ounce, any lower and China has shown itself a buyer. And time frame? The rise in the gold and silver prices has stalled. There is a lot of talk about the dollar weakening and of inflation, both of which would be supportive for gold and silver. But so far, inflation is low and the dollar is holding up relatively well. The analysts expectation is for a correction in the third quarter and for prices to firm again towards the end of the year and into 2010.