Disregarding other factors and assessing oil and gold markets only from a position of funds' behavior and the liquidity dynamics, we have to admit that the bullish sentiments prevail on these markets.
To make the picture complete, first I'll very briefly illustrate the hedge funds' recent activity using the charts, and then highlight some non-obvious issues associated with these activities.
Over the past four weeks, the net funds' position in WTI oil (NYMEX + ICE) grew by 54% and is now just a step away from the three-year maximum:
However, in terms of the seasonality, their net position is already more than three times higher than the three-year average for the current time of the year:
The critical dimensions of the net funds' position can be interpreted as both bullish and bearish signs because with the current situation, it can be assumed that further buying by the funds is unlikely and, moreover, they are likely to start to lock in profits and pressure the market.
But the situation may be interpreted differently, if we consider the relative size of their position (the ratio between the net position and the open interest), which despite the unprecedented growth of open interest (+ 11.3% over the last month) is still not a record one and leaves a lot of opportunities for further purchases by the funds:
The analysis of parallel changes in oil prices and the funds' net position also brings us to some interesting conclusions.
During the two weeks from 4 to 17 November, something similar to technical correction was observed in the oil market. As a result, the WTI price fell by 2,62%, however, the position of funds grew by 7,41%:
In my opinion, the fact that the funds, already keeping quite a lot of purchased oil contracts, benefited from the market correction and made more purchases, indicates that the current WTI price is not yet at the level at which the technical correction may scare the funds making them at least think about locking in profit.
Putting It All Together
So, considering the oil market solely in terms of the behavior of the funds, which is a reflection of speculative sentiments in the market, I believe that the bullish momentum in this market is still far from its limit.
I discussed the fundamental reasons for the growth of oil prices in the medium term in a separate article.
I believe that in the coming month the WTI price has high chances to grow to $62. Correction to $54 will not signal a turn in the market:
Applying the foregoing to the dynamics of the United States Oil ETF (NYSEARCA: USO) (a fund that tracks the price of Sweet Light Crude Oil), I expect similar growth towards $12.
The analysis of funds' behavior in the gold market indicates that, apparently, yet another sales cycle on the side of the funds has completed, and now a new bullish momentum is arising.
Since the end of October, the price of gold has been unable to break through the level of $1267, and a solid support is now fixed here. It is interesting to note that during this consolidation period the funds have increased their net long position in gold by 8% mostly opening long positions:
In the last two weeks, the gold market liquidity, in spite of rolling back from September peaks, was steadily above the three-year average, which is typical for consolidation rather than market reversal:
The ratio of sold to bought contracts remained at below 15% over the last two months, which is also a sign of the bullish sentiments:
Finally, considering the interdependence between the size of the funds' net position and the gold price, we see that the current position of funds almost perfectly reflects the formed interdependence between these indicators pointing to the balanced state of their position:
Putting It All Together
So, judging by the funds' actions, the gold market is gradually emerging from the phase of consolidation, getting ready for the next wave of growth. In my opinion, in the next two to three weeks, it is reasonable to expect active purchases by funds followed by the growth of the gold price to the level of $1316.
For the price of the SPDR Gold Trust ETF (GLD) (a fund that tracks the price of gold), this means support at the level of $120.18, as well as the likely growth to the level of $125 in the horizon of one month:
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in OIL FUTURES over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.