Something has to give. We can’t have speculators dumping gold and still holding record short positions in the U.S. Dollar.
Gold futures are edging lower on Monday as a steady U.S. Dollar dampens foreign demand for the dollar-denominated asset. The greenback is currently hovering around a two-month peak hit last week after political uncertainty accelerated ahead of the first presidential election debate between U.S. President Donald Trump and his Democratic rival Joe Biden.
While the outcome of the debate and its influence on the polls will not be known until late Tuesday/early Wednesday, on Monday, the focus is likely to remain on whether U.S. policymakers can agree on a new fiscal stimulus package. After Friday’s firm trade, today’s price action suggests investors are growing more skeptical that a deal can be reached over the short-run.
On Sunday, U.S. House Speaker Nancy Pelosi said a deal could be reached with the White House on a coronavirus relief package and that talks were continuing. Despite these encouraging words, the price action suggests the deal is still up in the air as far as gold investors are concerned.
Specs Reduce Bullish Gold Positions
Speculators reduced their bullish positions in COMEX gold and silver contracts in the week to September 22, the U.S. Commodity Futures Trading Commission (CFTC) said on Friday.
Meanwhile, data on U.S. currency futures positions released on Friday pointed to more upside in the dollar’s recovery, with speculators holding a big net short position in the greenback.
Data from the CFTC showed speculators held a net short position of $33.989 billion, up from $31.524 billion the week before and near the highest level in almost ten years.
Few investors now expect the U.S. Congress to pass any stimulus package, seen as vital to support the pandemic-stricken economy, before the election. This could be read as bad news for gold, but on the flip-side, this news could also be considered a wild card.
The most interesting news is the CFTC data. The recent steep break can be explained easily by the reduction of bullish positions in COMEX gold. However, the CFTC data on the U.S. Dollar suggests gold is vulnerable to an even steep plunge if short-dollar speculators decide to start covering their massive bearish position.
With net short dollar positions at their highest level in almost ten years, gold investors should be aware of the risks they face should economic conditions worsen to a point when global investors have no choice but to buy the U.S. Dollar for protection.
Since the U.S. Dollar is heavily weighted by the Euro, traders need to be wary of a weaker Euro due to further unwinding of Euro long positions.
“We have no shortage of concerns in Europe including rise in coronavirus infections in France and so on, attempts by European Central Bank policymakers to talk down the Euro and the Brexit,” Makoto Noji, chief currency strategist at SMBC Nikko Securities said in a report.
In my opinion, something has to give. We can’t have speculators dumping gold and still holding record short positions in the U.S. Dollar. We’re looking at a potential powder keg.