Authored by Shree Kargutkar, Portfolio Manager, Sprott Asset Management LP
The Turkish lira has seen its value drop an astonishing 40% since the beginning of the year. The Argentine peso, the Brazilian real and the Russian ruble are the other victims of the emerging markets thrashing that continues to unfold.
As investors have fled the emerging markets and sought the safety of the U.S. dollar and U.S. equities, they have continued to increase their short positions in commodities. Most surprisingly, and counterintuitively, bets against precious metals (gold, silver and platinum) have reached record levels.
The People’s Bank of China (PBOC) has kept a close eye on the emerging markets currency carnage. After seeing it’s yuan decline by more than 8% since April 2018, the PBOC reacted by imposing a stiff 20% reserve requirement on forward currency contracts. With the PBOC making it more difficult to short the yuan, and with the inverse correlation between gold and the yuan sitting at a five-year high, we wonder if traders are using gold as a proxy for shorting the yuan? Other astute investment managers have suggested this dynamic as well.
Figure 1: Correlation Between Chinese Yuan and Gold at Five-Year High (2013-2018)
Source: Bloomberg. XAU, the ISO 4217 standard code for one troy ounce of gold, versus Chinese Yuan (CNY), as of August 20, 2018.
Net speculative positioning in gold has declined significantly, currently at a 15-year low. Net positioning in silver has recovered slightly from a 10-year low set in April 2018. With investor’s sentiment at depressed levels, the short positioning in both silver and gold is catching our eye.
Short positions in gold are up 275% year to date. Investors are now short just over 215k contracts of gold or nearly 21.5 million ounces of gold. Short positions in gold have overwhelmed longs, whereby the net positioning in gold is now -3,688 contracts. The last time we saw a number this low and this negative was in 2001 when gold traded below $300/oz.
Figure 2: Speculative Gold Futures Shorts on CFTC Have Reached All-Time Highs (2008-2018)
Source: Bloomberg. CFTC CEI Gold Non-Commercial Short Contracts/Futures Only as of August 20, 2018.
We have seen gold do well following previous spikes in short interest. With over US$25 billion of gold being shorted, any meaningful short covering should produce a significant price appreciation in gold.
Figure 3: The Current Opportunity: Inverse Relationship between Spot Gold and Gold Futures Shorts (2013-2018)
Source: Bloomberg. XAU, the ISO 4217 standard code for one troy ounce of gold, versus the CFTC CEI Gold Non-Commercial Short Contracts/Futures Only as of August 20, 2018.
Interestingly, silver shorts are also at record highs at the time of this writing, up nearly 84% year to date. The latest data indicates that investors are short over 96,000 contracts of silver, representing almost 480 million ounces. This number is astounding to us for many reasons. With 852 million ounces of silver mined in 2017, 480 million ounces represent over 56% of 2017 annual silver production. Out of 852 million ounces, 209 million ounces ended up in silver jewelry and 657 million ounces were used in industrial fabrication including silverware. These two uses of silver alone represent 866 million ounces, according to The Silver Institute: World Silver Survey 2018 and are larger than the annual mined supply. The gap in supply and demand is met by silver scrap.
Suffice it to say that silver supply is tight. There are no mines scheduled to come on in the next year or two which would increase annual silver output by anything close to 450 million ounces. Unless an asteroid carrying half a billion ounces of silver lands on earth, we believe the shorts are playing a dangerous game with little to gain
Silver Futures Shorts at All-Time Highs (2008-2018)
Source: Bloomberg. CFTC CEI Silver Non-Commercial Short Contracts/Futures Only as of August 20, 2018.
The bonfire of currencies has succeeded in distracting investors away from more important topics that underpin our bullish thesis on gold, namely, the escalating global trade war, rising geopolitical tensions and spiraling debt and budget deficits in the United States. Bearish sentiment towards precious metals has reached a climactic phase. If past is prelude, the current shorting frenzy in gold and silver futures will likely be followed by an intense short-covering rally.
Read my colleague Trey Reik's recent post, Summer Test, for an even more in-depth look at gold's recent performance.
This content is intended solely for the use of Sprott Asset Management USA Inc. for use with investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.
This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to www.sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.
The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.
The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.
You are now leaving sprottus.com and entering a linked website.Continue
You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.Continue to Sprott Exchange Traded Funds
You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.Continue to Ninepoint Partners