Commodity Discovery analyst Li Gangfeng wrote that last week, Powell indicated that the Federal Reserve is not in a hurry to cut interest rates. He believes that if the US economy develops as they predict, then the US will cut interest rates twice more this year, totaling 50 basis points (this year it will be a total reduction of 1%). After the speech, both the stock market and gold showed signs of deflating. Coupled with the better-than-expected new jobs data released in the US last Friday for September, the market's expectations for the interest rate cut in November have shifted from 50 basis points to 25 basis points, reducing the popularity of gold.

The new job data previously provided by US official agencies has been proven to be a joke (in the past year, new jobs have been revised downward by nearly a million). It seems that the market is still naively trading based on the data provided by the government. In other words, the trend of the investment market is completely in the hands of the government's preferences and is decoupled from the fundamentals, which is a dangerous thing. He stated that even though the technical side of gold has shown a trend of deterioration, do not ignore that the situation in the Middle East has provided support for gold prices.

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

As of last Tuesday, only platinum and copper in US futures metals saw a continued increase in fund net long positions, while other metals experienced a decline in fund net long positions.

US futures gold fund long positions fell nearly 6% last week compared to the previous week, ending three consecutive weeks of increases; fund short positions plummeted by 35% at the same time. As a result, fund positions fell from a net long of 793 tons to 775 tons, marking the 51st consecutive week of fund net long positions (previously it was 46 consecutive weeks of net long), and also 85% of the historical high of 908 tons in September 2019 (close to the highest level in recent years). As of October 1, the US dollar gold price has accumulated a 28.9% increase this year (previous week +28.7%), while fund long positions have accumulated a 49.7% increase during the same period (previous week +58.3%).

Silver, which has a high correlation with gold prices, has always been more volatile than its rich cousin. US futures silver long positions fell by 9% last week compared to the previous week; fund short positions rebounded by 18%, resulting in fund positions falling from a net long of 7,167 tons to 5,969 tons, and marking the 30th consecutive week of fund net long positions, while also being 39% of its peak. As of October 1 this year, the US dollar silver price has accumulated a 32.2% increase, with silver fund long positions accumulating +44.6% (previous week +59.4%), and short positions accumulating a 25.3% decrease (previous week -36.9%).

US palladium fund long positions rose by 7% last week compared to the previous week; short positions fell by 10%, resulting in a net long increase from 24 tons to 30 tons last week, the highest level in the past 18 weeks. Historically, the longest continuous net short position of US palladium funds was 31 weeks (from April 2018 to October 2018).

US palladium fund net short positions fell back to 24 tons. The author believes that even though the bull market for palladium has ended, as long as palladium maintains a large net short position, it may still be difficult for other precious metals to completely reverse the trend. US palladium fund positions have been in a net short position for 97 consecutive weeks, the longest net short position in history.

Funds in US futures gold net long positions have risen by 84% year-to-date (accumulated a 101% increase in 2023)

Funds in US futures silver net long positions have risen by 125% year-to-date (accumulated a 44% decrease in 2023)Platinum net long positions in U.S. futures have risen by 13.2% year-to-date (down 7% in 2023)

Copper net long positions in U.S. futures have risen by 175% year-to-date (down 0.3% in 2023)

Despite global inflation heating up in recent years, metal prices have fallen to varying degrees, primarily due to the lack of funds in the futures market to take long positions and drive leverage effects. If someone had a crystal ball years ago and knew that global inflation would soar, conflicts would arise, and various uncertainties would emerge, and they took long positions in precious metals in the futures market, they would likely lose money. Since the pandemic spread globally in 2020, the net long positions of precious metals in U.S. futures have continued to decline, reflecting that funds are deliberately preventing precious metals from rising.

The CFTC weekly report for U.S. copper futures began in 2007. Since copper was in a bear market from 2008 to 2016, it is not surprising that most of the historical net positions in U.S. copper futures have been net short. However, starting in 2020, due to the impact of the global pandemic on the supply side and mine operations, coupled with market expectations of strong demand for copper in electric vehicles, copper prices rose and even reached new historical highs. But currently, the global investment philosophy is that the world is entering an economic recession, leading to reduced demand for commodities.

In October, or by 2025, one should be cautious about a potential slide in copper prices. Copper prices have a high correlation with U.S. stocks. On the other hand, our country has increased the intensity of capital investment in the stock market, which may help copper prices from a confidence perspective.

The author has updated the gold price to gold mining stock indicator, which provides important insights into the short-term direction of gold prices. Last week, the U.S. dollar gold price/North American gold mining stock ratio increased:

The gold price/North American gold mining stock ratio as of Friday (the 4th) was 16.78X, up 2.6% from 16.36 on the 27th, marking a rise for the third consecutive week. The ratio had reached a new high for the year at 19.22X (based on closing prices) 33 weeks ago. The ratio has risen by 2.1% for the year to date. For the full year of 2023, the ratio has cumulatively increased by 13.2% (up 6.4% in 2022), with the highest ratio in 2023 and 2022 being 17.95, and the lowest positions in January being 13.99X and 11.24X, respectively.

The author believes that tracking the stock prices of overseas gold mining companies is one of the more reliable forward-looking tools. That is, if gold prices continue to rise but gold mining stocks experience a sharp decline, caution is warranted.

Gold-to-Silver Ratio

The gold-to-silver ratio is one of the indicators used to measure market sentiment. Historically, the gold-to-silver ratio has operated at levels of approximately 16 to 125 times:The more panicked the market generally becomes, the higher the gold-silver ratio tends to rise. For instance, in 2020, the global spread of COVID-19 caused the gold-silver ratio to once surge past the historical high of 120 times.

Last Friday, the gold-silver ratio index was at 82.37, down by 1.8% month-on-month, and has accumulated a decline of 5.0% this year. In 2023, it has risen by 14.0%, with the highest and lowest points of the year being 91.08 and 75.93, respectively. In 2022, it fell by 3.1%.

It should be noted that both the dollar gold price/North American gold mining stock ratio and the gold-silver ratio have clearly shown a trend of bottoming out and rebounding. The financial market has distinctly entered into an economic recession trade.

The market anticipates a significant reversal in the probability of a rate cut by the U.S. in November.

At the time of writing, the market believes that the probability of the Federal Reserve cutting rates on November 7th, with a one-time reduction of 50 basis points, has plummeted from 53.3% two weeks ago to 0% last Friday. Currently, the market considers it highly likely, at a rate of 97.4%, that there will only be a 25 basis point reduction in November:

This is the distribution chart of the interest rate probability forecast for the United States in December 2024 by the futures market at the time of writing:

As of last Friday, the market consensus was that the U.S. would cut rates by an additional 50 basis points for the rest of the year.

A week ago, the market believed there was a 49.7% chance that the U.S. would cut rates to 4.00%-4.25% by the end of the year, but by last Friday, this probability plummeted to 17.7%. On the other hand, the probability of a rate cut to 4.25%-4.50% surged from 21.3% a week ago to 80.2% last Friday, indicating that the market believes the U.S. is becoming more cautious in its rate-cutting pace. Such a significant adjustment in the market's expectations for U.S. interest rates in just one week once again confirms what the author has said: after a long period of verification, the futures market's predictions for U.S. interest rate trends, especially long-term expectations, are generally incorrect. For example, the market had originally expected the Federal Reserve to cut rates by only 25 basis points in September, but the probability suddenly surged a week before the interest rate decision as some market participants likely received insider information.

It was originally believed that when the Federal Reserve cut rates by 25 basis points in September, it would be the time for the U.S. stock market to peak; thus, the 50 basis point cut was indeed a bit surprising (it should be noted that the economic data released by the U.S. a week before the September interest rate decision was not that bad). The result of the 50 basis point cut was to (temporarily) shift the recession trade back to an optimistic trade.

Last week, Powell indicated that the Federal Reserve is not in a hurry to cut rates. He believes that if the U.S. economy develops as they predict, then the U.S. will cut rates twice more this year, totaling 50 basis points (a total of 1% for the year). After the speech, both the stock market and gold showed signs of deflating. Coupled with the better-than-expected new jobs data released by the U.S. for September last Friday, the market changed its expectation for the U.S. rate cut in November from 50 basis points to 25 basis points, reducing the popularity of gold.The previously provided data on new job positions by U.S. official institutions has been confirmed to be a joke (the number of new jobs added in the past year has been revised down by nearly a million). It seems that the market is still naively trading based on the data given by the government. In other words, the trend of the investment market is completely in the hands of the government's preferences and is disconnected from the fundamentals. This is a dangerous thing.

The current market situation is clear: if the U.S. stock market does not experience a significant drop (in which case safe-haven assets would benefit), both risk assets (the most popular companies in the U.S. stock market, digital currencies, silver, copper, and other commodities) and safe-haven assets (including bonds and gold) will rise to varying degrees.

However, it should be noted that the next Federal Reserve interest rate meeting will be in November. In other words, the focus of the U.S. stock market in October is likely to shift from interest rate cuts to the U.S. presidential election. Given that the two candidates currently seem to be evenly matched, it is estimated that due to the impact of uncertainty, the U.S. stock market in October may become more volatile.

On the other hand, according to the World Gold Council, before the National Day holiday, both China and India saw local gold prices discounted compared to international prices, which may reflect that the gold price has been overbought in the physical market:

Whether Chinese gold prices can shift from a discount to a premium after the National Day holiday may be a key factor for gold prices in the short term.

The biggest challenge in the next 12 to 24 months will be if the U.S. begins to cut interest rates, but inflationary pressures pick up again, what should the Federal Reserve do?

Although the technical side of gold seems to be deteriorating, do not ignore that the situation in the Middle East has provided support for gold prices.

Although the local currency has appreciated recently, the author believes it is only a transitional reversal after the strong dollar became a crowded trade. Especially although the environmental protection stock market rebounded last week, the author tends to believe that this rebound is just a false fire/luring more funds to enter and take the baton, so personally, I suggest gradually reducing risk assets during this rebound (but not sure how long it will last) and holding on to profits to ensure peace and prosperity.