Rising Open Interest, Prices Suggest Funds Returning To Gold Futures

January 7, 2016

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(Kitco News) – The rise in gold prices during the first four days of the week has coincided with an increase in open interest for Comex futures, suggesting fund managers and other speculators are returning to the market as buyers, analysts said.

This means the rally has more substance than if it were simply the result of short covering, in which traders buy to offset or exit bearish positions, said George Gero, precious-metals strategist with RBC Capital Markets Global Futures.

Most-active Comex February gold hit a two-month high of $1,107.40 an ounce Thursday morning. That reflected a gain of $46.90, or 4.4%, so far in 2016.

The rally occurred amid tensions between Saudi Arabia and Iran, as well as turbulence in Chinese stocks that have spread to equities around the globe, resulting in a safe-haven bid for gold.
Gold open interest, which is the number of open positions at the end of the business day, stood at 422,006 futures contracts on Wednesday, according to data on the CME Group website. This was a one-day gain of 8,318.Gold bars

“Some of the funds have started to tiptoe back into the long side of the market,” Gero said. “There are enough fundamental reasons why they would be doing that.”

There’s a market axiom that if any commodity rises during a time of declining open interest, the price gains are most likely the result of short covering. However, if prices and open interest are increasing together, the assumption is that fresh buying is boosting the market.

“If you get open interest going up and prices going up, the theory is that prices are going up because people want to buy it,” said Charles Nedoss, senior market strategist with LaSalle Futures Group. “They are paying up to get in.”

The key for gold now, he said, may be whether equities recover their lost ground.

Gero commented that it’s conceivable even more funds might have been buying gold, except some had to use available cash to meet margin calls in the energy complex and copper, which have been under pressure. Crude oil fell to its lowest level in more than a decade.

Gold rose back above $1,100 an ounce, and this may be acting as a “wake-up call” to some of the funds, Gero added.

Meanwhile, UBS strategist Joni Teves pointed out that Comex gold open interest has risen by 1.24 million ounces between Dec. 29 and Wednesday. Dec. 29 was the cutoff date for the last weekly positioning data released by the Commodity Futures Trading Commission.
“This suggests that the CFTC report due this Friday is probably going to show some tentative rebuilding of gross long positions,” Teves said. “It will be interesting to see if the current risk-off mode has spooked some of the recent gold shorts. The extent of short covering will serve as an indicator as to how convinced the market is of the current mood and gold’s ability to benefit from market jitters at this point.”

The most recent weekly positioning data from the CFTC showed that money managers in the disaggregated report held a net short-position of 27,201 futures contracts as of Dec. 29.

By Allen Sykora of Kitco News; asykora@kitco.com