Speculative oil & gold positioning

A technical look at speculative positioning among gold and US crude oil futures traders suggests more downside ahead in current longs. The reported dumping of more than 55 tonnes of gold in New York and Shanghai on Sunday night following the PBOC's revelation that it held far less gold reserved than anticipated, may have prompted Comex speculators into fresh selling.

With the trendline support standing in gold net longs standing around 42,000 contracts, a break below it this week is plausible. Next week's FOMC announcement could well be a key catalyst for swaying the balance of power further into the bearish camp, on the pretext that a September rate hike is viable.

Which brings us to oil. At time of writing, US Light Crude oil hit a fresh 3-month low at $49.07, losing 21% from its May high. Although gold has fallen 7% relative to oil from Jul 6th, the last 2 days have seen a relative recovery in the yellow metal versus oil. We have already warned against the dangers of sub- $50 oil, forcing severe cuts in capital expenditure by big oil/gas.

And considering that energy sector capex accounts for almost 40% of total capex in S&P500 companies and non-energy capex has remained below 2008 highs as companies are busy investing in their shareholders by buying back stocks and paying dividends, what would become of the corporate spending boost to the economy?

Then there is chatter that big US explorers such as Chesapeake Energy & Conoco Phillips have seen their bond ratings approach default status. Further oil decline is a question of “when” not “if”.  Once oil drops below $43, prepare to see a new excuse for the bond market to further delay expectations of a Fed hike.

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