Fed Boosts Gold, But We Think The Narrative Is Changing - And This Factor Will Become Its Primary Driver

March 19, 2017

Summary

  • Speculative traders sold and shorted gold in anticipation of the Fed meeting, which was the completely wrong move.
  • As the Fed did what everybody expected, gold traders bought back previously sold positions in a “sell-the-rumor and buy-the-fact” moment.
  • Asian gold premiums remain fairly subdued despite the price move in gold.
  • With the Fed's move over, we think gold will now be focused on US fiscal and tax policy which we think will disappoint investors and boost gold.

The latest Commitment of Traders (COT) report showed a large drop in speculative long positions leading up to the Federal Reserve meeting, which obviously was the wrong move by speculators as gold popped after the Fed's decision on a "sell-the-rumor and buy-the-fact" moment. We think much of the rise in gold after the Fed meeting was due to this overextended short position by speculative gold traders as evidenced by the surge in shorts (and drop in longs) leading up to the meeting.

In terms of physical gold premiums, in Asia they were mixed last week as Chinese premiums surged due to tightening import restrictions by the Chinese government. In contrast, Indian premiums fell from $2.00 to $1.50 over domestic gold prices, which was attributed to Indians paying advance tax for the fiscal year (India's fiscal year ends in March).

Finally, we think there's a shift in the gold narrative. The focus is shifting from the Federal Reserve and the direction of interest rates being the primary driver to one where the US government's policy and tax positions will be carefully scrutinized by gold traders.

We will get more into some of these details but before that let us give investors a quick overview into the COT report for those who are not familiar with it.

About The COT Report
The COT report is issued by the CFTC every Friday, to provide market participants a breakdown of each Tuesday's open interest for markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. In plain English, this is a report that shows what positions major traders are taking in a number of financial and commodity markets.

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