NOTE ON GOLD AND OPEN INTEREST
July 27, 2020
On June 29, I put out a tweet with a chart of the front Gold (GC) contract and aggregate open interest, suggesting that longs were blown out of the market in the global COVID-inspired margin call in March, and might have to chase the GC contract up to re-establish longs. A friend (thanks Marco) suggested that I update the chart. At the time (end of June) agg Open Int in GC was 546k contracts. Currently aggregate OI is 607k contracts, which is still well below the high in the beginning of the year of 800k, EVEN THOUGH GOLD MADE NEW HISTORIC HIGHS TODAY. I’m no expert on global flows of gold, but to me, this suggests that there’s plenty of upside room. Below is the updated chart.
Two additional notes.
First, there was an article on ZeroHedge that 5.5 million ounces of gold were delivered into the June Gold contract expiration. Typically a negligible amount of physical is delivered. The author suggests it’s because NY gold was trading at a premium to London, creating an arbitrage opportunity. Clearly there is intense focus on gold as an investment theme currently, as any scan of financial press headlines will confirm.
https://www.zerohedge.com/markets/record-170-tons-physical-gold-were-just-delivered-comex-heres-why
Second, and this one might be a bit of a stretch, I also created a shorter term chart with the front emini SP contract, ES1, and aggregate open interest. What we see here is that open interest soared in March, as portfolio managers used the contract as a hedge against long stocks. You can see that from the start of the year until early Feb, the contract didn’t register much of a demand for a hedge, as open interest was horizontal. I overlaid VIX as well, but it essentially shows the same dynamic so I omitted in the interest of simplicity. We want the hedge after it starts to move. What I find a bit interesting here is that even with VIX at around 25, open int in June and July is also flat-lining at a slightly lower level than the start of the year. It just seems as if the market is convinced the Fed has our backs and will continue to support the rally. No use in taking any proactive safety measures. De-fund the hedge.
