The month of December has historically been a strong one for stocks with the tail-end of the year ushering in a Santa rally more often than not. But this time around equities markets are anything but bullish all thanks to trade war fears and an environment of sustained interest rate increases.
Luckily for gold traders, this situation has been playing right into their hands.
For several months now, commodity traders have been placing more bearish bets on the yellow metal than bullish ones-- a bearish signal.
However, that changed by the end of the week ending Dec. 11 with bullish bets outstripping negative ones for the first net bullish position since July. You can discern that by looking at CFTC’s latest Commitments of Traders report, which indicates that gold’s managed money long positions were 98,251 vs. 87,999 for managed money short positions, yielding a significant 10,252 net positive contracts.
That’s actually a reversion to the norm.
Gold bets by large traders usually sit in a net long position most of the time, and the condition that has persisted since July was an exception rather the norm, indicating extreme bearishness.
What is happening now is significant, because it’s a clear indication that the gold market is coming back to its senses with traders paring down their stocks holdings in favor of gold--which is exactly what’s supposed to be happening at this stage of the business cycle.
The bullish momentum for gold and gold mining stocks has slowly been building up for three months now, while stocks have been losing steam over the timeframe. Gold has crushed the market, gaining nearly five percent over the past three months compared to a 12-percent drop by the S&P 500.
Gold miners have been even more impressive with the NYSE Arca Gold Miners Index (HUI) tucking on gains of 12 percent over the timeframe. Gold mining stocks tend to act as a levered play on gold, magnifying its moves (both positive and negative) by a factor of 2x or 3x.
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Source: CNN Money
The Fed Hikes Rates
On Tuesday, Trump cautioned the Fed to go easy on rate hikes:
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The editorial to which he was referring was this one that opines “…economic and financial signals suggest [Fed Chairman Jerome Powell] should pause.’’
The market itself was bracing for one final hike this year and zero in the coming year. On Monday, the president was incredulous that the Fed was contemplating another hike this year let alone any more in 2019.
Unfortunately, the Fed has granted neither their wish.
The Federal Reserve has just announced this year’s 4th quarter-point interest rate hike that will take the target range for its benchmark to 2.25-2.5 percent. The central bank has also penciled in another two hikes for 2019. While that’s a reduction from its earlier projections of three hikes, it’s still two too many for the market. Related: North America’s Largest Diamond Ever Discovered In Canada
What’s more, the language used in the post-meeting statement was neither as dovish as expected nor as easy on outlook for rates. Notably, it continued with its previous statement that further "gradual" rate hikes would be appropriate though it did soften the tone a bit.
That language is neither bullish for gold nor for equities, and both have predictably been sliding. By the time of going to press at 3.20pm ET Wednesday, the S&P 500 was down 1.7 percent for the day; SPDR Gold Shares were down 0.5 percent while gold miners have been hardest hit after plunging 5.3 percent.
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Gold investors were obviously hoping for a more dovish tone. However, all is not lost …
FOMC lowered its outlook for long-run fund rates to 2.8 percent from three percent in the September forecast. Meanwhile, it lowered the 2019 estimate at 2.9 percent from 3.1 percent and the 2020 rate at 3.1 percent from 3.4 percent. The Fed said that future rate decisions will be data-dependent, which is actually a good thing now that it lowered GDP growth outlook to 2.3 percent in 2019, a 0.2-percent point reduction.
But ultimately, the fortunes for the gold market will probably be determined by how stocks perform going forward. As former Fed chairman and gold bug Alan Greenspan told CNBC, investors should run for cover to safe havens like gold since it’s going to be very hard for equity markets to make any meaningful gains from here.
Greenspan recommends a 10-percent weighting for gold with five percent in bullion, jewelry and coins and the other five percent in mutual funds, ETFs and high-quality gold stocks.
By Alex Kimani for Safehaven.com
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