European Natural Resources Fund: Global stock markets are starting to experience sharp declines. Buy gold in stages after each sharp decline

According to the Zhitong Finance and Economics APP, Li Gangfeng, a special analyst for the European Natural Resources Fund Commodity Discovery, posted on Refinitiv that unless the Federal Reserve cuts by 50 basis points on September 18th, a 25-point cut is likely to trigger the traditional investment wisdom of "buying on rumors, selling on news". After all, Western markets have been deploying rate cut trades since the first half of 2023, and it is time to make profits. In other words, US stocks may peak this month (if Trump is re-elected, there may be a honeymoon period of about half a year for US stocks), and gold may become an ATM, pulling down gold prices when the stock market falls. However, at present, whenever gold prices plummet, funds clearly flow in for bargain hunting.

Data Source: CFTC/LSEG Workspace

For comparison purposes, the metal equivalent of COMEX gold is divided by 10, and the metal equivalent of COMEX silver is divided by 100.

Currently, the reference value of Nymex palladium is very low.

As of last Tuesday, there was a decrease in long positions but a significant increase in short positions in various metal funds in the US futures market, leading to a net long position unwinding, reflecting the market's shift from rate cut trades to recession trades.

Last week, the long positions in the US futures gold fund fell slightly by 3% compared to the previous week, marking the second consecutive week of decline; at the same time, short positions in the fund rose by 14%. As a result, fund holdings fell from a net long position of 737 tons to 705 tons, marking the 47th consecutive week of net long positions (previously 46 weeks) and accounting for 78% of the historical peak of 908 tons in September 2019 (falling from near historical highs). As of September 3rd, the price of gold in US dollars has risen by 20.7% this year (up 22.3% the previous week), while long positions in the fund have accumulated a 35.9% increase during the same period (up 40.5% the previous week).

Silver, which is highly correlated with gold prices, has historically exhibited stronger volatility than its cousin. Last week, long positions in the US futures silver fund fell by 8% compared to the previous week; short positions in the fund surged by 56%. As a result, fund holdings fell from a net long position of 5487 tons to 4121 tons, the lowest level in the past three weeks, marking the 26th consecutive week of net long positions and accounting for 27% of its peak period. As of September 3rd, the price of silver in US dollars has risen by 18.0% this year, with long positions in the silver fund accumulating a +12.9% increase (up 22.3% the previous week) and short positions accumulating a 24.1% decrease (down 51.2% the previous week).

In the US platinum fund, long positions fell by 10% last week; however, short positions surged by 45%. As a result, net long positions fell from 5 tons to a net short position of 17 tons, the lowest level in the past 26 weeks, ending two consecutive weeks of net long positions. Historically, the US platinum fund maintained a net short position for the longest consecutive period of 31 weeks (from April 2018 to October 2018) The net short position of the US Palladium Fund has risen to 40 tons, continuing to hover at historically low levels. Even though the bull market for palladium has ended, if palladium continues to maintain a huge net short position, it may still be difficult for other precious metals to completely reverse the trend. The US Palladium Fund has been in a net short position for a record 94 consecutive weeks.

The fund's net long position in US gold futures has risen by 67% since the beginning of the year (accumulated increase of 101% in 2023).

Source: CFTC/LSEG Workspace

The fund's net long position in US silver futures has risen by 56% since the beginning of the year (accumulated decrease of 44% in 2023).

Source: CFTC/LSEG Workspace

The fund's net long position in US platinum futures has fallen by 164% since the beginning of the year (accumulated decrease of 7% in 2023).

Source: CFTC/LSEG Workspace

The fund's net long position in US copper futures has fallen by 3% since the beginning of the year (accumulated decrease of 0.3% in 2023).

Source: CFTC/LSEG Workspace

Basically, from the above charts, it is clear that despite global inflation heating up in recent years, prices of various metals have experienced varying degrees of decline, mainly due to the lack of funds in the futures market to drive leverage for long positions. If someone had a crystal ball years ago and knew about the sudden global inflation surge, conflicts, and various uncertainties this year, and went long on precious metals in the futures market, they would most likely lose money. The most ironic thing is that since the spread of the pandemic globally in 2020, the net long positions of precious metals in the US futures market have continued to decline, reflecting a deliberate effort by funds to prevent precious metals from rising.

The CFTC weekly report on US copper has been available since 2007. Due to copper being in a bear market from 2008 to 2016, it is not surprising that most of the historical net positions of US copper futures have been in a net short position. However, starting from 2020, due to the impact of the global pandemic on the supply side and mining operations, coupled with market expectations of strong demand for copper from electric vehicles, copper prices have risen, even reaching new historical highs. But the current global investment sentiment is that the world is entering an economic recession, leading to reduced demand for commodities As the US presidential election (in October) approaches, or by 2025, one should be cautious about the potential decline in copper prices. Copper prices are closely related to the US stock market.

An update on the important indicator for the short-term direction of gold prices towards gold mining stocks. Last week, the USD gold price/North American gold mining stock ratio saw an increase:

Source: LSEG Workspace

The gold price/North American gold mining stock ratio as of Friday (6th) was 17.37X, up 6.8% from 16.27X on the 30th. The ratio reached a new high for the year of 19.22X (closing price basis) 29 weeks ago. It has accumulated a 5.7% increase for the year so far. In 2023, it rose by 13.2% for the whole year (6.4% in 2022), with the highest ratio in 2023 at 17.95, and the lowest in January 13.99X and 11.24X in 2023 and 2022 respectively.

Tracking the overseas gold mining stock prices is a reliable forward-looking tool, so if gold prices continue to rise but gold mining stocks experience a sharp decline, caution is advised.

Gold-Silver Ratio

The gold-silver ratio is an indicator of market sentiment. Historically, the gold-silver ratio has operated at levels ranging from approximately 16 to 125 times:

Source: LSEG Workspace

Generally, the more fearful the market, the higher the gold-silver ratio, such as in 2020 when the COVID-19 pandemic spread globally, causing the gold-silver ratio to reach a historical high of over 120 times.

The gold-silver ratio index was 89.43 as of last Friday, up 3.1% from the previous period, with a 3.1% increase for the year. It rose by 14.0% in 2023, with the highest and lowest points in 2023 being 91.08 and 75.93 respectively. It decreased by 3.1% in 2022.

It is important to note that both the USD gold price/North American gold mining stock ratio and the gold-silver ratio are clearly showing a trend of bottoming out and rebounding. The financial markets are clearly entering a period of economic recession trading.

Market Expects a Sharp Increase in the Probability of a 0.25% Rate Cut in the US in September

The market believes that the probability of a 0.5% rate cut on September 18th has dropped sharply from 49% five weeks ago to 30% as of last Friday:

Image Source: CME Group

This is a futures market prediction of the interest rate probability distribution for December 2024 in the US:

Image Source: CME Group

As of last Friday, the mainstream market belief was that the United States would cut interest rates 3-4 times this year (the probability of only two rate cuts has dropped to zero), equivalent to a 0.75%-1% reduction for the year.

Over a month ago, the market believed there was a 64.9% chance that the U.S. would cut rates to 4.50%-4.75% by the end of the year. However, this probability has now plummeted to 8.7%. The market now believes that the pace of U.S. rate cuts will be more aggressive, with the probability of a rate cut to 4.00%-4.25% soaring from 21.8% a week ago to 42.7%. This adjustment in the market's expectations for U.S. interest rates this year once again confirms the saying: after a long period of verification, futures market predictions of U.S. interest rate trends, especially longer-term expectations, are generally wrong.

Let's not talk about U.S. economic data, as they are just excuses for the overall market rise and fall. However, as always emphasized, in the face of a clear downward trend in the market, it is advisable to gradually reduce holdings of risky assets. Clear signals include:

The gold-silver ratio and the price of gold in U.S. dollars/North American gold mining stock indices have already confirmed a bottom and rebounded, reflecting an increase in market risk awareness.

The U.S. Department of Labor has downwardly revised the past year's new job creation data, indicating a misjudgment of the U.S. economic environment by the market.

Bacon County has been continuously reducing its holdings of Bank of America since mid-July, holding a significant amount of cash, making Bacon's view on U.S. stocks self-evident.

Retail investors bought $5.9 billion worth of Nvidia stock in August, reaching a historic high (compared to May, retail purchases exceeded 600%), clearly indicating distribution by funds and company management, with retail investors buying at high levels.

In fact, making money in the investment market in the long run is not too difficult. Besides being bold, meticulous, and quick to react, it is simply a matter of following the crowd when things are going well, but going against the grain when a turning point appears. In foreign countries, there is also the possibility of making money in both rising and falling markets.

Unless the Federal Reserve cuts rates by 50 basis points on September 18th, a 25-point cut is likely to trigger the traditional investment wisdom of "buy on rumors, sell on news," as Western markets have been deploying rate cut trades since the first half of 2023. It's time to take profits. In other words, U.S. stocks may peak this month (if Trump is re-elected, U.S. stocks may have a honeymoon period of about half a year), and gold may become an ATM, pulling down gold prices when the stock market falls. However, at present, whenever gold prices plummet, funds clearly flow in for bargain hunting.

The biggest test in the next 12 to 24 months will be if the U.S. starts cutting rates, but inflation pressures resume an upward trend, where will the Federal Reserve go from there? Do not ignore the possibility of the Middle East situation deteriorating at any time, and do not rule out the possibility of Spring River Duck deploying gold in advance in response to the situation in the Middle East.

Although local currencies have appreciated recently, it is just a transitional reversal after the previous strong US dollar squeeze trade. In particular, although environmental protection stocks rebounded across the board last week, I tend to believe that this rebound is just a flash in the pan/tempting more funds to enter the market to pass on the baton. Therefore, I personally suggest gradually reducing risky assets during this rebound (but not sure how long it will last) to secure profits