Anticipating Hedge Funds Trading Gold Bullion

Forex Market Education 

How to become a master of a handful of markets?

As a trader you all well know that the demands rigors of this discipline is severe and the consequences for the lack of focus detrimental. To become a master in this arena you cannot become a Jack of all trades. Time and time again the successful trader has to go back to the drill square and practise again and again and again a handful of particular skills and maneuvers until the sharpness for market combat is honed and the mind at a constant state of readiness. Learn 6-7 markets inside out and the rest becomes as second nature as shadow boxing.

My recommendations for evolving an all-encompassing portfolio would include:
the S & P 500 since US equities are the engine of the global economy, the USDX representing the US Dollar against a basket of currencies, EUR/ USD and GBP/ USD  being the 2 most liquid forex contracts representing the global currency flows between Europe and the USA, gold bullion as the store of value and crude oil WTI as the barometer of the global economy. These 6 markets are some of the chief favorites for hedge funds to move their positions in search of global macro strategies that can set speculative motion to shape price trends for any given year.

Right; coming to hedge funds and their global macro strategies. If you want to become a successful trader and if you have the good sense to understand that technical charts may not always reveal the real price dynamics in a market, then there are 2 things that you really need to learn quickly: firstly, how not to get flattened when the Titans fight among themselves in the arena and secondly how to move quick-witted and fleet of foot as the giants themselves start piling up positions and move markets with monumental exertions.

Global macro strategies of hedge funds are at the heart of gold bullion rising dramatically in prices over the last several years and then collapsing back down to the current level of 1200.

On the physical side the uses of gold are plenty from jewellery to electronics and medical whereas the investment side of bullion attracts large banks and central banks to use this class of asset as a hedge against inflation or depreciation of equities from the perspective of risk management.

2015  was noted for weakening global industrial and retail sales balanced against central bank purchases. Consequently, annual mine production actually shrunk by some -16ton for the first time since 2008. The recycling business of gold also continued to shrink. Although the seasonal demand particularly in Indian and Chinese markets at the end of the year saw an overall annual expansion of retail demand by 6% and 3% respectively, overall the actual physical demand for gold was far less than anticipated due to the earlier Grexit and Chinese troubles mid-2015.

Gold bullion daily chart - courtesy Omega Research

The COT data is showing no changes at 76% overall bullish since 1st March 2016 with large specs long at 258, 646 vs short 79,815. Now we spoke of central banks stepping in and buying Oct 2015 - Dec 2015 as the physical demand cash market became weaker but follow the dramatic rise in price in a chart from January 2016 and then all of a sudden commercial banks became net sellers as COT reveals a current 127,081 long vs a mighty 325,075 with only 28% of commercials being bullish.

Gold bullion weekly chart - courtesy Omega Research

Now please take very careful note of this commercial short position. At the end of the day commercials are represented but the retailers and manufacturers who require physical gold for commercial grade use as well as central banks buying or selling in open market operations for risk management as a hedge for their currency reserves.

So what exactly are the COT figures telling us at the moment in this whopping zig-zag which saw prices collapse Oct - Dec 2015 and then rise Jan - mar 2016? What the charts are telling us is that when industrialists agree to an OTC forward purchase, they are then shorting the bullion as a hedge in anticipation of lower prices. Equally central banks deeming inflation to be well under control in Europe and Asia, do not have a need to hold gold reserves equating to 3 months currencies reserves and so they are shorting the market.

Hedge funds realising the current physical needs of industrials will always try to step in and tweak the markets. Knowing that the US economy is about to hit 2% inflation and irrespective of falling to sideways physical demand, hedge funds anticipating a rise in rates by 25 basis points and fall in bond prices, are pushing this market in a zig and a zag at every opportunity between quarterly US economic GNP data. Therefore the current massive long position in bullion is a consequence of the huge market belief in Q4 2015 that the US Fed would push rates to + 50 basis points by December 2015. That did not happen, therefore the global macro strategy of hedge funds now dictates that a sell off in gold futures contracts needs to take place  for the moment until we can see the full shape of the Q1 2016 US GNP figures which will determine the next movement for hedge funds.  

Gold bullion monthly chart - courtesy Omega Research

To sum up the hedge fund global macro play for Q4 2015would be expressed as the following formula:

short US fixed income product + short US equities + long USDX + long gold bullion.

So having understood the global macro play of hedge funds between interest rate products and bullion what would be the forecast should the Q1 economic data of the US come out as tepid with a low chance for US rate increase by 25 basis points and given that all things being equal the physical demand of gold bullion remains a constant?

The result would be an opposite position as gold contracts get cleared out now:

long US fixed income product + long US equities + short USDX + short gold bullion.
 
Now coming to the technical side of the bullion markets. the current sell off is generating the usual Fibonacci retracements: the primary upward move being the recent Jan 2016 move of 1045 to 1307.38 (Jan 2016 high). Unfortunately the recent push faltered at 1280 and so prices quickly fell back to the current 1220 region but is threatening to sell off down more to the 50% Fibonacci at 1176.65 and then the 61.80 Fibonacci at 1145.78 and perhaps the 78.60% retracement of the last upward move at 1101.82. Small day traders follow these Fibonacci like the Bible and would be keen to combine this study with COT data to come to terms with a huge net long futures position which can be interpreted as the residue of the last hedge fund global macro play hedging US interest rates.

For future direction the key will be the release of US Q1 GNP data in April 2016 which shall determine if central banks start buying gold bullion all over again as a hedge to their currency reserves and hedge fund commence another long strategy if the outlook for a rate increment in the USA remains strong.

At the moment bullion is drfting neutral to lower with small blood letting now and short-covering which should not be read as a technical bounce but understood in terms of clearing out some of the net longs before the next play can be decided by hedge funds.

When hedge funds sparked off the massive sell offs in crude oil and EUR/ USD we can notice how these strategies usually last for several quarters in the year. So it will be interesting to note the outcome of the next set of US GNP data to determine if the current lull in bullion trading is a mere sideways pause before a large thrust upwards or the precursor to a dramatic collapse to the 1045 region in later April/ May 2016.
 

Pieter Bergli - Trader X16.

A non-profit commitment to provide education on the properties of currency markets


Disclaimer - U.S. Government Required Disclaimer - Commodity Futures Trading Commission

Futures  and Options trading involves risks of losses. No representation is  being made that any reader and account will or is likely to achieve  profits or losses similar to those that are being discussed on this blog  http://forexeducationperspective.blogspot.com/. The past performance of  any trading system or methodology discussed is not necessarily  indicative of future results.

CFTC  RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN  LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO  NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN  EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT,  IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED  TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE  DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE  THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR  TO THOSE SHOWN.

All  trades, patterns, charts, systems, etc., discussed in this blog  http://forexeducationperspective.blogspot.com/ are for educative and  illustrative purposes only and not to be construed as specific advisory  recommendations for actual trades. Disclaimer -   http://forexeducationperspective.blogspot.com/ bears no responsibility  for the trading actions of its readers.


* European  Union laws require European Union visitors to this blog to know that  cookies are used by Blogger  and Google, including use of Google  Analytics and AdSense  cookies and in reading material from this blog do  consent to the use of such cookies