Special Update: Gold, Silver, Dollar and Rates
Obviously flight to quality and save haven are going to be featured this week in gold with other markets like silver, platinum, palladium, Bonds and the Yen figuring into the mix. Historically there might be fewer events with as much safe haven potential as the current North Korean situation. At least in the short term the dialogue and actions of North Korea is likely to be seen as slightly more important to gold, than threats from the US/allies as the market is beginning to factor in another test which the market mostly accepts will then a prelude to a US/Japanese strike. The end-game on North Korea is probably at hand and should increase volatility in gold and silver to fairly significant levels! So far we don’t think gold is “mostly bought out” yet as the Commitments of Traders Futures and Options report as of August 29th for Gold showed the Non-Commercial and Non-reportable combined traders a net long position of 262,971 contracts and a mostly bought out positioning might be 320,00 contract. However, latest reading represents a one week increase of 36,387 contracts in the net long and adjusted from the rally into the recent high we estimate the net long to be close to 300,000 contracts. Similarly the Commitments of Traders Futures and Options report as of August 29th for Silver showed Non-Commercial and Non-reportable combined traders held a net long position of 65,571 contracts and that represents a one week increase of 10,382 contracts in the net long position. The silver market is hardly overbought in our opinion and it may be able to garner more fresh buying interest than gold in the action directly ahead. In fact, silver might exhibit less volatility than gold in the coming week and might still provide safe haven gains in the event there is a historical incident! Gold derivative holdings have reached up to the highest levels since September of 2016 which is a sign of investment flowing toward gold.
MARKET IDEAS: With the Dollar not showing initial safe haven gains the bull camp is really getting the information and market action to justify a rise to the next resistance zone around and old double high of $1,353.40 with the next higher critical point coming off the weekly chart up at $1,364 and finally up at $1,399. Silver might forge less upside than gold initially but it might provide some safe haven market exposure without as much volatility as gold. Consider the purchase of 2 near to expiration just out of the money gold or silver puts for every long gold or silver futures contract!
With very disappointing US payrolls at the end of last week the prospect of any hike in rates before the end of the year becomes much less likely. Given the lack of safe haven reaction in the Dollar last week it appears that the Dollar is going to largely miss out on a potentially major safe haven event/environment ahead. It is also possible that pre-emptive action from the US could leave the US out of favor among a large portion of the world and could also signal US instruments carry the most risk of the currency complex and that could set the stage for a fresh 2017 low! The Commitments of Traders Futures and Options report as of August 29th for US Dollar showed Non-Commercial and Non-reportable combined traders held a net long position of 2,770 contracts. This represents a decrease of 1,895 contracts in the net long position held by these traders.
While Treasuries will show some flight to quality buying interest ahead, traders need to be watchful of a currency related limitation on the prospective safe haven rally. In other words the bias might be up but in the event that the US launches an attack not sanctioned by the world community could result in the Dollar, Bonds and Notes seeing some rotation to non-US instruments. However, it is extremely difficult to take control away from the bulls this week after the disappointing US payrolls, Geopolitical issues and also because of bullish charts. The week could bring a fantastic blow-off top in prices. The Commitments of Traders Futures and Options report as of August 29th for U.S. Treasury Bonds showed Non-Commercial and Non-reportable combined traders held a net long position of 45,536 contracts which means the spec and fund long is already overbought and might become excessively overbought this week. Similarly the Commitments of Traders Futures and Options report as of August 29th for US Treasury 10 Year Notes showed Non-Commercial and Non-reportable combined traders held a net long position of 125,105 contracts. This represents an increase of 41,876 contracts in the net long position held by these traders.