Gold — Open Interest at 5-year low, volumes unchanged

August 10, 2014

New York (Aug 10)  Support for spot gold remains at the 200d MA, currently at $1,284. This level has held well the past week, especially in the face of a US dollar that has continued to strengthen – in particular against the euro. Yesterday, gold rallied from $1,284 to as high as $1,309.

The CFTC data published on Friday last week indicated that net speculative length as a

percentage of open interest for gold was still relatively high at 26% (compared with

the 5-year average of 24%), implying that support via the futures market for the gold

price is becoming compressed. Looking more closely at COMEX gold, it is interesting

to note that aggregate open interest for gold has fallen to the lowest levels since May

2009. At the same time, aggregate daily volume has not declined substantially,

indicating that positions are not carried over overnight (hence lower open interest)

and that participants generally prefer to day-trade and close positions, most likely

because of gold’s range-bound nature since April last year. But this would also

indicate to us that rallies, like the one yesterday, whether triggered by short-covering

or new longs (on the back of e.g. heightened political risk), are likely to be short-lived,

given that positions are generally not carried for long periods of time and closed out

quite quickly.

Our tactical view stands: gold’s bias lies to the downside based on (1) price-sensitive

and weaker y/y physical demand, as well as (2) expectations of higher real interest

rates. However, it is clear from futures market behaviour that day-trading markets will

keep prices volatile on an intraday and intraweek basis. It is therefore also informative

to look at where interest in the option market interest lies, as this could reveal

something about expectations. For the September futures contract (with options

expiring on 26 August), call option open interest is large at every strike from $1,300

all the way to $1,330. The strike with the largest open interest is at $1,320 with

3,434 contracts. On the downside, open interest for puts are high for strikes at

$1.300 all the way to strikes at $1,270, with the largest open interest at a strike of

$1,275 (with 2,624 contracts), closely followed by the $1,270 strike (with 2,541

contracts). The distribution is relatively evenly spread, with $1,300 roughly in the

middle. This, combined with a market which doesn’t want to carry positions overnight,

could make for a few more weeks of trading around the $1,300 level. However, given

our overall fundamental view, we do not foresee new buying interest if gold pushed

above $1,330. However, we could see selling if gold dropped below $1,284.

Source: Standard Bank

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