The latest CFTC data, for the week ending 25 February, confirms what we knew already –
new longs have entered precious metals in general and shorts have continued to decline
(see table). The net effect is that the net speculative position in precious metals is higher
on a w/w basis, with palladium being the only exception.
In contrast, copper shorts rose during the same week, with the net speculative COMEX
copper position now firmly in negative territory.
What stands out for us is that when measured as a percentage of open interest, the net
speculative length for COMEX gold, silver and platinum is now in line with the 5-year
average levels, implying that, from a futures market perspective, the market is not
underweight anymore, but more neutral.
In contrast, the futures market remains underweight palladium relative to its historic
positioning as measured on both a 5-year and 1-year basis, with shorts rising and
speculative longs declining.
For gold, specifically, we mentioned last week that demand in Asia was generally weak.
This remains the case. However, this morning, with markets opening in Asia, and on the
back of the rising political tension in the Ukraine, the US 10-year government bond yield
dropped below the strong technical support at its 200d MA. We believe US long-term
interest rates, and in particular real interest rates, have become a key driver of whether
we are likely to see more ETF liquidation. The 10-year US government bond yield has
moved lower since the start of January, from just above 3% at the start of the year to the
current 2.59%. The decline in the nominal bond yield has also translated into a lower real
interest rate, as proxied by the 10-year US inflation-linked bond yield, which has
dropped from just below 0.8% in December to the current 0.56%. Gold traditionally has
had a negative correlation with long-term US real interest rates; a lower bond yield would
imply a higher gold price.

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