This week, we’ll revisit the macro relationship between the gold and the U.S. Dollar Index. Then, we’ll examine the divergent trading behavior in the gold market between the large speculators who’ve recently set a new record position, and the commercial gold hedgers who are clearly happy to sell all of the forward production they can above $1,300 per ounce. Finally, we’ll discuss the relative and quantitative models based on the Commitments of Traders data that leads us to believe that the large speculators may be giving themselves too much credit for their recent success.
Something happened on the way to parity between the US Dollar and the Euro currency. Amidst the rhetoric of Mario Draghi and his Quantitative Easing forever platform, both the Dollar and the Euro have accumulated record positions among the commercial traders. Given the trend and considerable decline this seems reasonable until the data is actually absorbed consciously and it becomes clear that the record positions in both markets are opposite the trend and bode strongly for this spread to narrow.
Monday began with an official COT Sell signal in the U.S. Dollar Index that we published in TraderPlanet. This trade was actually a follow up to the previous week’s piece also published in TraderPlanet.
We combined these into one post including the annotated US Dollar Index chart in – The USD Index – A Speculative Bull Trap?
More specifically, this piece should be titled, “Diminishing Effects of Global Quantitative Easing in a Long Only Portfolio,” but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan’s direct equity purchases a sure thing? Have we globalized the, “Bernanke Put?” The European Central Bank, the Bank of Japan and the Peoples’ Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.
This week’s theme was the same as last week, expecting that some of these markets had gone too far, too fast and were ripe for a turnaround. Like last week, our strategies have continued to be on the wrong side of the markets.
Combine our programs to build your own Equity Curve.
See our Sample Portfolios for examples and ideas including the portfolio tracked at Futures Truth.
The U.S. Dollar has been the best house in a bad neighborhood since the U.S. Federal Reserve Board announced its intentions to taper the U.S. economy off of its monthly stimulus supplements. Protracted issues in Ukraine and the sanctions levied against Russia have created a major capital flight from Eastern Europe as a whole. The European Union recently announced its own form of Quantitative Easing and finally, on Halloween, Japan dropped the mother of currency bombs. Their announcement that they would not only invoke another round of currency destruction but would also become direct investment participants in their own stock markets created a shock through the investment landscape that I’ve not heard in non-crisis times.
The weekly Commitment of Traders report published by the Commodity Futures Trading Commission tracks the markets’ players of consequence. The report breaks down the actions of the commodity index funds, managed money, small speculators and finally, the commercial traders. For the purpose of this article, we’ll focus on the commercial trader category. I’ve been reading these reports for twenty years and there’s a phenomenon that I’ve counted now 13 times in the S&P 500 futures that is usually tied to the expiration of the quarterly contracts. This setup has had a 76% forecasting accuracy for the period in which we measured its effectiveness. Most importantly, we find ourselves in the middle of this rare event even as we speak.