There is no compelling reward/risk tradeoff in either direction for gold prices.
Gold and silver market positioning reveals no major extremes and plenty of mixed signals:
- Gold: The spot price is hovering around the 200-day moving average, which itself has gone flat after falling for much of 2013. Trading sentiment is neutral at 50%. Net speculative futures positions as a percent of open interest (OI) are stuck below the 30-50% zone common during the bull market and above the 10-20% zone during last year’s washout. ETF holdings and futures market open interest have fallen substantially, but downward momentum is ebbing.
- Silver: Trading sentiment and speculative futures positioning are oversold. The caveat is that there are plenty of “stale ETF longs”. Silver prices peaked more than three years ago at .55, versus .42 currently. Yet silver ETF holdings are close to an all-time high and futures open interest is at the high end of its four-year range.
Gold and silver prices face fundamental headwinds, but they are only slowly taking shape. Fed normalization, higher real interest rates and a firm dollar will eventually prompt new lows in safe haven precious metals.
[Gold Insight: John Doody: Gold Industry Consolidation Will Continue – It’s All About Stock Picking in This Market]
[Silver Insight: David Morgan: Silver Production Curtailed – Good Time to Accumulate for Long Term Investors]
In the interim, gold and silver could benefit from a combination of low real interest rates, higher investor risk aversion and a firm euro. Potential drivers include softer U.S. housing data, simmering tensions between Russia and the West over Ukraine, a global equity correction and/or ECB unwillingness to undertake quantitative easing despite near-zero consumer price inflation.
Bottom Line: There is little reason yet to aggressively position in gold or silver, given the absence of a fundamental trend and/or market positioning extreme.
Source: BCA Research
