The impact of hedge funds on gold prices is only short-term, and the market demand is the guarantee for gold prices to maintain an upward trend.
Precious metals website Schiffgold wrote that according to the Trader's Positions (COT) report released on December 3, as of November 30, hedge fund companies, including fund management institutions, seem to be driving the trend of gold prices.
The report shows that gold's sell-off momentum has been exhausted. After the release of the October employment and inflation data, hedge funds began to go long, and the steady breakthrough of the gold price of $1800 is the best proof. Since then, gold prices have consolidated around 1870, making several attempts to break through this level, and after success, the upward resistance weakened, and gold prices were eventually pushed higher to nearly $1880.
However, Fed Chairman Jerome Powell's re-election nomination caused the support of gold to collapse in an instant, and it turned out that the gold price fell more rapidly than it rose, and the gold price fell below $1800 again.
Recently, the weak non-farm payrolls report in the United States in November can only provide support for gold prices to hold steady, and the focus of the market is now focused on the inflation report released on Friday, which will lead to "more hawkish Fed policy" or "safe-haven demand"? In the short term, it all depends on the hedge fund. As shown below, hedge funds completely dominate the entire market.
The relationship between gold prices and hedge fund positions
Net long positions in gold futures held by hedge funds have increased from 86,000 lots to 92,000 lots since last month, and on November 16, net long positions peaked at 142,000 lots, but this has not driven gold prices higher as it did earlier this year. In June, when the net long position reached 250,000 lots, the price of gold was $1898/oz.
Over the past few weeks, "other" (other than hedge funds) market participants have maintained relatively stable gold positions, while hedge funds have been trading frequently. Since January 2018, hedge funds have taken control of the gold market, and changes in hedge fund positions have perfectly matched the movement of gold prices. The chart below shows the strong correlation between hedge fund trading and gold price volatility.
Hedge funds are more relevant to the price of gold than other factors, except in 2020. At that time, "other" market participants joined forces to push gold higher, causing hedge funds to lose control of the market. Gold prices hit record highs in 2020 thanks to strong ETF funding flows and record deliveries on the New York Mercantile Exchange.
It is worth noting that in April 2019, when the net long position of hedge funds reached around 37,000 lots, the gold price hovered around $1300. On September 28, 2021, when the net long position just reached 30,000 lots, the price of gold reached $1735. Back now, $1750 is providing strong support for gold prices, while $1800 is showing strong resistance.
Therefore, while the strong correlation between hedge funds and gold prices does prove that hedge funds are driving the gold price trend, the impact of hedge funds on gold prices is only short-term, and the article says that market demand is the guarantee that gold prices maintain an upward trend.
The operation of hedge funds
The chart below shows the change in hedge fund's weekly holdings so far in 2020. Hedge funds have spent 4 weeks building long positions over the past 6 weeks, followed by another 2 weeks of strong sell-offs. Traders do not enter the market at the same time because there is no fundamental support for gold. Hedge funds, on the other hand, trade frequently, making money quickly through highly leveraged positions.
But real investors should ignore this short-term volatility and recognize that physical gold can withstand government incompetence and hedge against policy risks.
If investors are frustrated and confused by short-term price fluctuations, they can understand this phenomenon by observing the trading behavior of hedge funds. The following table provides detailed position information for hedge funds.
As you can see from the table, the growth of hedge funds' monthly net long positions in November was mainly driven by short positions. From October 26 to November 30, short hedge fund positions fell from 55,000 to 45,000 and long positions from 141,000 to 137,000 lots.
Market participants other than hedge funds have primarily adjusted their long positions for the rest of the week, from 152,000 lots to 137,000 lots. But "other" market participants still hold the largest net long positions. Their long gold positions were flat at 172,000 lots in November, and their short positions fell from 44,000 to 39,000, all of which occurred in the most recent week.
The chart below shows the monthly change in net gold holdings generated from COTs data (in USD/notional amount, not the contract price). The chart shows that the last round of gold price increases was in 2011, followed by a slow decline in 2015, until a new bull market began in 2016.
This chart also shows a surge in long positions for "other" market participants. In 2011, the total number of long positions held by "other" market participants reached $8.6 billion, compared to $30.6 billion in the most recent period.
The U.S. Commodity Futures Trading Commission (CFTC) also provides options data. The options market is dominated by producers, but hedge funds have recently had a greater impact on the options market. Hedge fund long positions fell from $2.8 billion to $2.4 billion during November, in line with the recent correction in gold prices.
A review of the hedge fund's historical net holdings (the sum of the notional values of existing positions after conversion into the underlying currency of the trading account) shows the correlation between the hedge fund's positions and the price of gold. Both the peaks and troughs of gold prices are reflected in the hedge fund's open interest volume.
However, following the sell-off in March 2020, this correlation did diverge strongly last year. Even as gold rose sharply, hedge funds were still cutting net long positions, possibly due to strong buying from ETFs not being reflected in the futures market.
The relationship between silver prices and hedge fund positions
Silver's recent movements have actually been driven by "other" market participants rather than hedge funds. While hedge funds were to blame for the silver plunge in September, their current net long positions remain relatively stable relative to "other" market participants.
It is even clearer from the weekly change in the number of silver futures contracts that hedge funds have indeed liquidated over the past two weeks, but they have only closed some positions that are about to expire.
It is important to note that hedge base November positions (excluding options or hedging positions) have a smaller movement of just 1600 lots, and hedge funds even increased their holdings in silver in the week ended November 23.
In the silver futures market, long positions drove most of the position movements, with hedge fund long positions rising to 54,000 lots from 52,000 reported on Oct. 26 and falling to 48,000 lots for the week ended Nov. 23. Net long positions of "other" market participants increased by 3,000 lots, four times that of hedge funds, and their long positions rose from 13,900 to 16,900 and then fell to 13,500 lots.
The graph below shows the monthly change in silver net holdings generated from COTs data. The chart shows that the last round of silver price increases was also in 2011, followed by a slow decline in 2015. From this chart, it is clear that silver prices have plummeted during 2020, with nominal long positions still well above the 2020 lows.
According to options data provided by the CFTC, non-reportable positions (i.e., positions of dispersed small-scale speculators) even exceeded that of traders. Silver options positions have fallen sharply from their peak in July last year and are well below their 2011 peaks.
Finally, the historical net holdings of silver show the correlation between the position and the price. Similar to gold, both peaks and lows in silver prices are reflected in open positions. Similarly, the recent increase in long positions has not driven silver prices to produce the expected price increase.
How do hedge foundations respond to the Fed?
Hedge funds, of course, use technical analysis to trade, which is why Fibonacci targets and round-number psychological thresholds such as $1800 are so difficult to break through. Over time, physical markets push up prices, but short-term movements are dominated by hot money (i.e., speculative short-term capital). How long will it take for hedge funds to see through the Fed's bluff? More importantly, how long does it take to get the physical metal after the paper contract is delivered?
Savvy investors should keep the long-term investment outlook in mind. Short-term volatility can be very easy to disappoint, gold and silver are not Bitcoin, they are not get rich quick instruments, because this will make them lose their "safe haven" characteristics. It's important to remember that it rises fast and falls fast. For bullion, investors should stick to the fundamentals, use the CFTC's analysis to explain short-term price fluctuations, and understand the hedging properties of physical precious metals.
This article is derived from Golden Ten Data