FOMC minutes turned the tide

Weekly market report by Alasdair Macleod, Head of Research, GoldMoney

FOMC minutes turned the tide - gold and silver this month

Following the release of the Federal Open Market Committee (FOMC) minutes last week, gold and silver have come alive, the gold price rising from a low of $1147 on 18th March to $1200 this morning and silver from $15.46 to $17.00, 4% and 10% increases respectively.

The Commodity Futures trading Commission’s (CFTC) Commitment of Traders Report released last Friday conveniently shows the positions of trading categories the night before the FOMC minutes were released. In gold, the Managed Money category sold down their positions to the lowest net long position since December 2013. This is shown in the chart below, with the dotted line representing the average net long position since 2006.

FOMC minutes turned the tide - managed money net gold contracts

This represents a dramatic turnaround in positions, and it has permitted the Swaps (mostly bullion banks) category to reduce its net short position substantially, shown in the next chart.

FOMC minutes turned the tide - gold swaps

This confirms that the Managed Money category, consisting mostly of hedge funds, was badly wrong-footed ahead of the FOMC release, being very short indeed. In other words, there has been a significant bear squeeze subsequently which has driven the gold price sharply higher.

A simple bear squeeze should be accompanied by a decline in Open Interest, because a bear squeeze forces wrong-footed traders to close their loss-making positions. However, Open Interest has been increasing, which it turns out is entirely due to an increase in spreads[i]. Since Wednesday, Open Interest has declined sharply, which suggests that spread positions have been closed as the April contract runs off the board. This is shown in the next chart.

FOMC minutes turned the tide - gold

NOTES TO EDITOR

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[1] Spreads are matching long and short positions designed to profit from price differentials after financing between different maturities

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