News

The Yuan-Gold Peg and the Commitment of Traders Report - Craig Hemke (01/08/2018)

One gold bar on the top of other two gold bars placed on red flag

Aug 1, 2018

The Commitment of Traders reports for COMEX gold and silver are back to levels that often precede price bottoms. Could they also be telling us something about the current yuan-gold correlation?

As background for this article, please be sure to review these two posts from last month: Has the PBOC taken control of the Gold Market & Potential Impacts of Yuan-Gold Peg where we first laid out the details of the current yuan-gold correlation and then projected what it might foreshadow.

Our working theory is that China—knowing that a massive devaluation of the yuan versus the dollar is possible/pending due to the expanding U.S. tariffs—is actively attempting to lower the dollar price of many commodities, including gold. Simply put, if the dollar price of these goods can be dropped by roughly the same percentage as the yuan devaluation, the relative cost of the goods in yuan remains unchanged.

Here are the last two months of CNYUSD and COMEX gold plotted together:

 

But again, it's not just gold. Here's the CNYUSD with COMEX copper:

Here it is with COMEX platinum:

And here it is with COMEX zinc:

 

 

 

As you can see above, however, the most pronounced correlation is in COMEX gold. The question becomes: Is this a deliberate program by the PBOC to act through their global accounts to influence the futures markets OR is this just a bunch of items, trading in tandem and simply reacting to the same stimuli of pending tariffs?

 

And this leads us to the most recent Commitment of Traders report for COMEX gold. On the report released last Friday, July 27, (surveyed Tuesday, July 24), we saw four significant levels:

 

The gold Large Spec GROSS short position was 172,203 contracts. This is a new ALL-TIME high, eclipsing the 159,441 level seen on July 21, 2015 (four days after "Gold Is A Pet Rock" - WSJ).

The gold Large Spec NET long position was 48,597 contracts. That's the lowest since January 19, 2016.

The gold Commercial NET short position was 65,668 contracts. That's the smallest since January 26, 2016.

The silver Large Spec GROSS short position was 84,487 contracts. This is a new ALL-TIME high. The previous peaks were 82,934 back on April 3 of this year and 81,400 contracts on July 14, 2015.

 

OK, on the surface, that's all pretty bullish, right? There appear to be record amounts of Spec short fuel for an epic squeeze. And most likely this is the case. All we need is a turnaround to start the short-covering extravaganza.

 

However, you should also consider this... One of the "solutions" that we've discussed for how the PBOC could drive the apparent yuan-gold link is massive shorting through offshore accounts. Sort of like how you see U.S. treasury buying and selling from places like the Cayman Islands when the TIC reports are reconciled (https://www.zerohedge.com/news/2016-06-15/what-behind-record-sale-75-billion-us-treasurys-foreign-holders). In this scenario, the Chinese could be using their own offshore funds to affect COMEX prices. If this were the case, these accounts would likely show up in the Large Spec category, as they almost certainly wouldn't be listed as Commercial.

 

Again, none of this can be proven. We are simply speculating. However, you'll recall that the yuan-gold peg really took over on June 15, two days after the FOMC. Gold had been steady and rising above $1300 and the CNYUSD was stable, too.

 

On the CoT surveyed Tuesday, June 12, the Large Specs were GROSS short 72,512 contracts. Again, as of last Tuesday, this position had grown to an all-time high of 172,023. That's nearly 100,000 new shorts! Now granted, much of this 100,000 came from "traditional" Specs such as hedge and trading funds, as price broke down through both the 200-day and 200-week moving averages. But 100,000 contracts?? That's 10,000,000 ounces of new shorting!

For perspective, let's look at the last couple of times COMEX Digital Gold has been smashed on a scale similar to the present:

After Trump's election, price fell from $1330 to $1130 in seven weeks. The Large Spec GROSS short position rose from 73,177 contracts on 11/1/16 to 112,305 on 1/3/17. An increase of 39,128 contracts.

At the bear market lows in late 2015, price fell from $1180 to $1059 in seven weeks. The Large Spec GROSS short position rose from 68,551 contracts on 10/27/15 to 143,141 on 12/8/15. An increase of 74,590 contracts.

In early 2015, price fell from $1290 to $1140 in seven weeks. The Large Spec GROSS short position rose from 43,991 contracts on 2/3/15 to 113,953 contracts on 3/24/15. An increase of 69,962 contracts.

At present, price has fallen from $1305 to $1215 in seven weeks. The Large Spec GROSS short position has risen from 72,512 contracts to 172,023. An increase of 99,511 contracts.

So, does this prove that the Chinese are driving the yuan-gold link as we suspect? Of course not. However, the CoT data certainly provides some circumstantial evidence of how it might be taking place. Would 25,000-30,000 contracts of PBOC shorting be enough to establish and maintain the peg?

It seems the answer may be in how the data changes when price finally begins to recover. At that point, we'll have to diligently watch the yuan-gold correlation and the CoTs to see if they change in unison. Will price rally in a traditional short squeeze or will price only crawl higher while the massive shorts remain in place, despite what would be significant margin calls? Will price finally break free of the peg as shorts are squeezed and covered? These questions will be answered in the weeks ahead, but it's good to start considering them now as we try to determine where gold prices are headed in the second half of 2018.

Product Upselling Spotlight

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

Learn More
about-sprott-skyline
Head shot of Craig Hemke

About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Comments

Chris
August 1, 2018 at 2:38 PM
I appreciate your qualified language, Craig. I wish more of the people who have noticed these correlations were as circumspect. A downward trend will correlate positively with any other downward trend, and negatively with any other rising trend. That means the only variables a declining trend will not correlate with are those that are neither declining or rising, ie, which are flat. The stronger the trend, the stronger the correlation tends to be, because there are fewer reversals in each series to muck up the correlation. If both trends go straight down, the correlation will be very strong (Pearson’s product moment correlation coefficient) or perfect (rank correlation, eg, Spearman’s).They all correlate because they are all going down, but is China causing the Argentinian Peso to decline, and the Turkish Lira, and most every other currency except the dollar, and is China also responsible for the strong negative correlation between the yuan and average daily temperatures in Spain, or the yuan and sales of sunglasses in Texas? I don’t know, but we should all acknowledge that the decline of the yuan will correlate negatively or positively with every trend except a flat one, and strongly with other strong trends. Perhaps the real danger lies in all these strong downward trends?