Ann: Credit Suisse Provides US$15m Financing Faci, page-10

re: Ann: Credit Suisse Provides US$15m Financ... Hi Matsyaji,

Here's a research piece from ANZ yesterday, on the large amount of short positions being held in gold at the moment. I have no idea why KRM is being so brutally savaged, but sure seems a good buy to me...

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- CFTC data show positioning in gold market at extreme levels

- Managed money shorts remain near record high

- If market sentiment turns, expect a big squeeze of the managed money shorts

Market positioning in the gold market is at extreme levels. The managed money short position is at record highs, creating scope for a squeeze in the USD8.5bn short position reported by the CFTC. The vulnerability of gold to a sharp short-covering rally is high.

CFTC Commitment of Traders (COT) data breaks down long and short positions on Comex gold by participant, which are broadly categorised as speculative, eg managed money, and commercial positions held by miners and merchants. The managed money sector is watched closely for market direction as this segment tends to drive short-term price moves.

As of 26 February, the managed money was long 116k contracts and short 62k. The net position was long 54k contracts, equivalent to 158.6 tonnes of gold worth USD8.5bn at current prices.

Figure 1. Comex gold managed money

Sources: Bloomberg, CFTC, ANZ

This is a small increase from the previous week, which at 42k contracts, was the smallest net long managed money position since November 2008 (see Fig 1). The managed money has been decreasing its exposure to gold since late 2012, and this accelerated in 2013. This is not just a result of cutting longs, but also increasing shorts. Managed money outright short positions are the largest since at least 2006, when the CFTC began disaggregating COT data.

On Tuesday last week, April 13 gold futures rallied USD35/oz in one session on suspected short covering, which was confirmed through the CFTC data released on Friday. But the price action since then suggests positioning has remained extreme and it continues to make the gold market vulnerable to a short-squeeze.

Gold prices have dropped by nearly 5% to USD1,580/oz since the start of February, coinciding with the release of FOMC minutes seen by the market as hawkish. Current prices at USD1,580 are more or less in the middle of the recent range and while we are biased to the upside, we do not have sufficient conviction to try and pick the bottom just yet.

We also note the amount of gold in the SPDR Gold Trust has dropped to 1,254 tonnes from 1,323 tonnes two weeks ago. The decline represents 5% of the fund and while large, we would need to see further outflows to call it a trend. The slide in the SPDR came at a time of rising physical gold coin sales in the US, suggesting retail investors still favour gold, and we wonder if the reduction in the SPDR is a programmed reduction by a fund investor. Either way, the volatile trading of the past 12 months highlights how changing market expectations pose a large risk and right now, a worsening in economic sentiment could result in rapid turnaround rally.

Figure 2. SPDR gold holdings and gold price