UNLOCKED: What Will Drive Gold Prices The Next 70 Days- Analysis


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What will Drive Gold Investment Flows the Rest of 2021?
There are many reasons money flows in and out of an asset. Inflation, deflation, recession, depression, fear, greed etc. But as the end of any fiscal year comes closer, impulsive buying and selling start to rise. Most investment funds close their year out while some prop desks start to eyeball next years investor recommendations for early adoption. This year we have a  other special  time-sensitive events intersecting with end-of-year seasonality. The Fed is going to be tapering and perhaps raising rates. Bitcoin investment is finally mainstream, and is likely  subject to more Government regs ( perhaps 2022 tax changes?) still unannounced. Finally, the LBMA,  its bullion bank dealers, and their customers may have a deadline to honor on  derivative-based metals contracts. Along with the ever-present seasonality, Gold and Silver have at least these three events converging at end of  2021. That is our focus here. The hope is that by laying out an overview of these drivers, traders and investors can  make well informed decisions in the next few months. They are the primary forces pushing people to decide what to do with their money for the rest of 2021 and into the first quarter of 2022
  1. Government Policy- The Fed’s economy to break
  2. Seasonality- “Sell season” gives way to “Buy season”
  3. Bitcoin Competition- New kid on the mainstream block with old school ideals
  4. Basel 3 Implementation- Deleveraging of the markets
1- Government Policy: Known and somewhat important
This is easiest to describe but hardest to time. Simply put, the hedge fund and CTA asset allocators have been betting on a lower Gold price for the last couple months due to expectations of: economic slowdown, Fed tapering of stimulus, and ultimately a rate hike. The CTA allocators are the new retail. They can be a large force that affects prices for months at a time. After that, they are almost always a casualty of their own success. Expect them to continue to look to get short, and alternately be forced to cover those shorts on data events. They have twice already that we have seen. They will be right until they are wrong and can be seen as a tactical indicator using open interest and CoT reports to help see their effect.
2- Seasonality: Known and very important
We have written on this many times, and experienced it first hand annually for 30 years going back to 1995. There is a demand seasonality in precious metals that is quite reliable. It governs annual flow changes and is almost impossible to hide from discerning eyes. And absent some exogenous event, assets dominance every year. Here’s an updated chart.
Its effect has become even more readily observable since 2012. Last year we wrote a detailed roadmap and it still serves. First explained in “Gold’s Buy Season is Coming:
Most institutions end their fiscal year on the calendar year. Some end it earlier, as early as November right after Thanksgiving Additionally many Portfolio Managers, especially those having a good year, tend to pull in reins to preserve profits. They start to book profits and reduce exposure to avoid jeopardizing their own year-end bonuses. When you combine institutional de-risking with a Portfolio Manager’s desire to preserve his own P&L, the result can be a pronounced move counter to the market’s prior trend. Now add in the fact that the December contract in Gold and Silver have the longest duration before rollover in their respective products and you can better see why the open interest in those contracts gets so much bigger than the other expirations. Less rollover means less discernable contango tax. Longer duration means less maintenance. And there is plenty of industry side liquidity from hedging producers and end-users.
Bullion banks and smart prop firms know this and if hedge funds start to make their way to the exits during this period - there usually is a fire sale.
In 2021 we had that event as almost every year. This year it occurred on August 8th.
The fact it happened earlier in the cycle may be why Gold hasn’t bled so much since then, but time will tell. What about the “Buy season”? Here’s what we wrote then:
Buy Season
Sometime between beginning of November and end of December, asset allocators begin announcing recommendations to their clients for the coming year. These are usually macro percentage allocations like “5% energy, 10% bonds, 70% stocks” and so forth.All done by banks and Registered Investment Advisors (RIAs)
It is at this time you begin to see the precious metals market begin to turn around based on the allocations suggested by firms.  This serves as catalyst for new money to pull the trigger on its trades. Even better; when the percent allocation increases for an asset, say 5% to 10% for metals, there is more buying.
Silver Too?
This is “buy” season and it happens every year not just in metals, but in all commodities. Its effect is historically most pronounced in Energy and Gold.  a.image2.image-link.image2-278-500 { padding-bottom: 55.60000000000001%; padding-bottom: min(55.60000000000001%, 278px); width: 100%; height: 0; } a.image2.image-link.image2-278-500 img { max-width: 500px; max-height: 278px; } It is a big factor in Silver, but harder to identify because of Silver’s unique status as: speculative, economic/industrial, and monetary qualities. More importantly. silver is very subject to open interest being lopsided and this frequently trumps allocation flows. Source
Plenty of times the OI in Silver was lopsided short and the “sell season” in gold was “buy season” in Silver. Basically, the whole seasonality between August and December is “close your book down when you can”.
3- Bitcoin Competition: Very important wildcard.
This will be especially pronounced in this year’s “Buy Season” described above. The arrival of Bitcoin in ETF form is a formidable competitor for investment flows into Gold like it or not. Registered Investment Advisors (RIAs) are now telling their clients to put a percentage of their money into Bitcoin as a substitute for Gold.1 We only care about the flows here. When banks suggest allocation into assets based on risks, they will say things like “If you buy Bitcoin, you will get inflationary protection and the potential of upside appreciation”. It will be a salesman’s paradise this year. But it is not without precedent. In several years, 2020 being the most recent much of Gold’s allocation was reduced in favor of Oil. Gold did not rally as much while Oil zoomed higher. If you are bullish you want to watch the interplay of Bitcoin, CTA short selling (as a result of Government Policy), and Buy Season
4- Basel 3 Deadline: Known and somewhat important
This has been something studied and used in trading since 2012. It has been going on forever and every time the paper shorts are under a deadline they get permission to defer. The current deadline is January of 2022. Unlike the past 8 years, we see this actually happening now as manifested in lower open interest, and lower volumes. Fantasies by salesmen of “squeezing the banks” are folly. What we see happening right now is hedge funds slowly selling out their long term longs as banks cover their long term shorts. This has been written on before as well. We view this driver as increasing volatility in metals both ways for the rest of the year in a continuation of what we said months ago. It raises the floor under Gold and Silver. It does not raise the roof. There will be a massive rally someday. On that day we’d bet the main Bullion banks will not be short. Basel 3 does not make that happen, but it does plant the seeds. We were part of a roundtable on Basel 3 recently. The group goes into depth on the effects it has and will continue to have. Be warned. The interview is very long.
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