Is The "Smart Money" Ready To Bet On Gold?

For the last three weeks, gold has experienced something that has never happened before -hedge funds aggregate net position has been short for the first time in history.

However, as Dana Lyons notes, this week saw another 'historic' shift in gold positioning as commercial hedgers shifted to the least hedged since 2001... so the 'fast' money is chasing momentum and the 'smart' money is lifting hedges into them.

Via Dana Lyons' Tumblr,

It’s no secret that commodities have taken a drubbing during the deflationary spiral over the past year. And precious metals have been right up front in this beating. This includes gold, which has lost over 40% of its value the past 4 years.  So needless to say, there has not been much good news on that front. However, as we touched on in a piece two weeks ago, there are signs beginning to pop up that may provide a glimmer of hope for gold bugs. In dollar terms, the price of gold continues to leak, offering very little evidence of any impending stability or bounce. On the other hand, in Euro terms, gold prices reached a key juncturea few weeks ago, as outlined in that previous post. And while no bounce has materialized as of yet, gold has at least held at the level we noted.

Today’s Chart Of The Day offers another hopeful data point for gold bulls. The CFTC tracks the net positioning of various groups of traders in the futures market in a report called the Commitment Of Traders (COT). One such group is called Commercial Hedgers. As their name implies, their main function in the futures market is to hedge. And while the Non-Commercial Speculators tend to be trend-following funds, the Commercial Hedgers’ postions tend to move contrary to price trends. Thus, it is almost always the case that these Hedgers will be correctly positioned – and to an extreme – at major turning points in a market.

How is that relevant for gold? As of this week, Commercial Hedgers are holding the lowest net short position in gold futures since the launch of the gold bull market in 2001.

Does this mean that a reversal higher is imminent in gold? Not necessarily. The thing with COT analysis is that it is difficult to correctly determine when an “extreme” in Hedgers’ positioning will actually result in a price reversal. As is said regarding all sorts of market metrics, an extreme in COT positioning can always get more extreme. Plus, the COT positioning can peak well in advance of the turn. Consider the Hedgers’ maximum net short positioning in gold futures which occurred in December 2009, 21 months – and another 50% gold rally – before prices topped.

Thus, it is tough to time trades with accuracy based on the COT report. However, one thing we can say in the gold bugs’ favor: what had mostly been a headwind for gold for the past decade or so is no longer the case. While it may not make an immediate impact, the “smart money” Commercial Hedgers are now more aligned with them than at any point since the bull market began in 2001.

More from Dana Lyons, JLFMI and My401kPro.

How New Caledonia’s export ban hit Chinese Nickel ore market?

Indonesia introduced an export ban on nickel ore since early 2014, and now, New Caledonia decided to place a nickel ore export ban to China. 

How the ban will affect China’s nickel ore market? 

Last week, foreign media reported the heads of the national and local governments along with mining executives’ vetoed exports of nickel laterites to China because of New Caledonia's long-standing supply agreements with Australia.

“The New Caledonia nickel export to China will have a negligible effect as exports of nickel ore from the country are very small,” SMM’s nickel analyst says. 

China imported 14.57 million ton of nickel ore during the first half of 2015, down 36.87% year-on-year, with 96.79% of imports from the Philippines, and 0.79% from Australia, the second-place supplier, according to China Customs. 

So far, the country has placed no ban on ferronickel export to China. In June, China imported 62,500 ton of ferronickel, with 10,482 ton of imports from New Caledonia, up nearly 3-folds to rank second, according to China Customs.

Chile’s copper exports down 24% in July

The latest statistics released by Chile’s central bank suggests significant drop in copper exports by the country during the month of July this year. Chile’s copper exports plunged nearly 24% year-on-year. The value of exports amounted to $2.398 billion during the month in comparison with the value of $3.171 billion during the same month a year before.

The sharp plunge in copper prices led to decline in copper exports by the country. The copper prices averaged at $2.48 per lb during July this year, almost 23% down when compared with $3.22 per lb during July 2014. The exports of cathode during the month dropped by nearly 19% to $1.102 billion, whereas the concentrate exports plunged heavily by 23% to $1.023 billion.

The cumulative copper exports by Chile during the initial seven-month period of the year amounted to $19.352 billion, down by 13% when compared with the previous year. The copper exports during January to July last year had totaled $22.244 billion. Exports of cathode dropped by 16% year-on-year to $8.796 billion, whereas those of concentrate declined by 6% to $8.898 billion.

The copper production by Chile is expected to total 5.8 million mt during the entire year 2015. Incidentally, Chile is the world’s largest copper producing nation.

Meantime, a report recently published by the Chilean Copper Commission (Cochilco) states that lack of up-to-date technology could lead to sharp decline in country’s copper production after 2025. According to the report, Chile may increase its copper output to almost 10 million mt by 2025, but several factors could lead to decline in output thereafter. The lack of new discoveries and complication in expansion of existing mines are cited as the key reasons behind the projected fall in copper output by Chile.

The all-inclusive cost to produce gold is about $ 1,100

“Gold’s father is dirt, yet it regards itself as noble” So goes a Yiddish proverb. Trouble is, it has not lived up to the proverb’s meaning: gold, like other commodities, has taken a beating over the past month.

Unlike many commodities, it has few industrial uses. A big chunk of demand is for investment. Gold held in exchange traded funds — a typical investment instrument — has fallen 40 per cent since a 2012 peak.

The recent gold price fall means more trouble ahead for gold miners. The all-inclusive cost to produce gold is about $1,100. If gold prices fall below $1,000, some gold reserves (assets) would be unprofitable to recover and need to be written down, putting pressure on the more indebted miners.

Gold cannot fall forever. Even so, listed gold miners should at some point be cheap. One early buy signal is when it costs less to buy mines on the stock market than to build them. Building a gold mine from scratch can be measured, crudely, by the cost of the investment (including debt) an ounce of gold produced. An average new mine would cost $2,500 an ounce of annual output, estimates RBC. Yet the larger listed gold miners still have an average enterprise value to production of $3,600.

More traditional valuation metrics tell a similar story. Despite the precious metal’s fall, the two largest miners by market value, Barrick Gold and Newmont Mining, still trade at double their forward price earnings multiples of two years ago.

Even if gold prices keep falling, it is far too early to sift the dirt for glitter.

Iron ore price rally has legs

The price of iron ore jumped on Wednesday as the market for the steelmaking raw material in top consumer China picks up and traders square positions ahead of a public holiday in the Singapore hub.

The benchmark 62% Fe import price including freight and insurance at the Chinese port of Tianjin advanced $1.40 or 2.5% to $56.40 a tonne, according to data provided by The SteelIndex. That's up just under 28% from record lows hit July 8.

The advance in the Metal Bulletin's benchmark 62%-index at the ports of Qingdao-Rizhao-Lianyungang in China was $1.49 to $56.78 while lower grade 58% fines soared $2.91 a tonne to $52.46, a 5.9% gain on the day.

Chinese steel prices have come off one-month highs hit yesterday but at $337 a tonne the most-traded rebar contract on the Shanghai Futures Exchange is up sharply from a record low of $305 hit early July.

Platts News reports that some Chinese steel mills have begun to raise output on the back of the higher rebar and billet prices:

"Many mills near Beijing will be mandated to reduce their steel output so as to ensure a clear blue sky in the capital," the source said. "Mills in the south that not affected by the output cut are producing as much as possible so that they have steel products on hand to sell when steel prices are expected to hike by end of this month."

That blue sky would be courtesy of the Chinese government which has halted all construction inside the capital city and ordered steelmakers in areas surrounding to make drastic cuts in production and ahead of September 3 military parade marking the 70th anniversary of the end of World War II.

Not everyone is convinced that the rally in steel and iron has much further to go. One steel trader told Reuters that "some traders and mills are trying to sell more as buying isn't as strong as the rally in prices and they are worried that prices might have hit the ceiling at the moment."

A slowing economy and rapidly cooling property market have seen the country's steel consumption contract by 4.7% in the first six months of 2015 according to the country's Iron and Steel Association (CISA).

China forges almost as much steel as the rest of the world combined and the country sucks in more than 70% of the world's seaborne iron ore.

LME Lead prices may drop to $1,670-1,680 a ton range next week

 LME lead should weaken towards $1,670-1,680 a ton next week, SMM lead group foresees.

Base metals should continue to be depressed by China’s negative indicators and stronger dollar next week, boding ill for lead prices.

Longs for LME lead exit market, driving positions down. Technical indicators also show signs of falling.

SHFE 1510 lead may slip to RMB 12,800 a ton next week with strong resistance forming at RMB 13,000 a ton.

China spot lead is expected to range between RMB 13,100-13,300 a ton next week. Trades should pick up early August. 

More lead smelters will resume operation but operating rate at motive battery makers will also increase due to battery price hikes.

Gold to dip below $1,000 by end of the year – report

Gold is doomed. That’s the message we are clearly getting these days from several analysts who predict prices for the metal have, at least, another 30% to fall by the end of 2015.

According to the latest Bloomberg survey of analysts and traders, bullion prices will hit $984 — the lowest price for the precious metal since 2009 — before the year-end.

Speculators are shorting the metal for the first time since US government data began in 2006, and holders of exchange-traded products are selling at the fastest pace in two years”

“Speculators are shorting the metal for the first time since US government data began in 2006, and holders of exchange-traded products are selling at the fastest pace in two years”, according to the report.

Analysts from Deutsche Bank predict a much greater decline than that.

"Gold would need to fall towards $750/oz to bring prices in real terms back towards long-run historical averages," they said Tuesday.

Prices for the precious metal have hit  five-year lows on expectations that the US Fed was going to hike interest rates for the first time in almost 10 years. As gold doesn’t pay income it benefited from the historic period of near-zero interest rates. Betting Fed officials were in favour of an increase, many decided to unload their gold holdings.

August gold was down $6.30, or 0.6%, at $1,089.90 an ounce in late morning trading the New York Comex after trading as high as $1,098.50 earlier. Prices were set to mark their sixth straight settlement under $1,100.

However the Federal Reserve on Wednesday both declined to rate interest rates and provide any clues about when a hike is on the way.