As U.S. traders return from the Thanksgiving holiday, not a lot has changed in the macro picture. The market is still factoring in the likelihood of a December rate hike — 74 percent currently — and asset prices are moving accordingly.

Historically, fed hikes are actually net bullish for gold after the event, but there is little about this cycle that is typical of history. The biggest departure from precedent is that the Fed looks poised to move entirely on its own and with the backdrop of a neutral BoE and a dovish ECB, BoJ, PBoC.

If you are a macro punter looking at interest rate differentials, this is an interesting case study. Realistically, 25 bps is probably not enough to drive us to parity with the British pound, but it very well could happen with the euro and is many a bank's base case now.

From a long-term perspective, it does appear we will all be witnesses as the frequency and amplitude of hikes going forward after the initial hike will become the determining factor.

Bull Case

  • CFTC positioning for Managed Money back to record short levels, with GC going net short again by almost 15k contracts.
  • Silver positioning is back below its one-year average at only 9k lots net long.
  • 14-day RSI for both gold and silver are telling us it's a bit oversold.
  • Chinese official entity purchases are continuing apace, and the Shanghai premium for physical remains toward the high end of the range at $4.
  • The DXY seems to run into real resistance at 100 and has failed another breakout attempt.
  • The rallies in the two-year yield has slowed at 1.95 percent and the 10-year is actually selling off back to 2.25 percent. This is a flat curve, implying low hopes of a steep tightening cycle from the Fed.
  • Put skew is a bit too high with one-week to one-year puts a solid 3 vols (mid) over calls.
  • CTAs seem to have been the bulk of the selling and a backwardated EFP for both gold and silver seems to support that. Any rallies will have quick covers.
  • Silver is incredibly well supported at anything below $14.
  • Earnings growth estimates are rolling over in the U.S., in particular on strong dollar concerns and weak consumer demand.

Bear Case

  • ETF assets continue to decline in what seems to be a general exposure reduction to the space overall from individual investors.
  • Macro funds seem to be getting massive asset redemption if headlines are any indication on years of underperformance. They have historically provided some of the largest chunks of gold purchases.
  • Indicative of macro liquidation and terrible fundamentals, the Bloomberg Commodity Index is at levels not seen since 1998.
  • December is not historically a good month for gold and more importantly, after three down years, I don't think any funds want XAU or GLD in their end-of-year 13(f) filings.
  • A rate hike is coming. Though maybe just one.
  • December is historically a good month for equities on the "catch-up" trade, but that is weak causality at best.

Chart 1

Plumbing the depths. Shorts above longs (red higher than green) is exceedingly rare. The net of the two is the yellow in the middle for perspective with a moving average in green. This is overdone.

Chart 2

Bloomberg Commodity Index at levels not seen since 1998 and shows little sign of slowing. Chinese producers of base metals are asking officials to open inquiries into the evil practices of short sellers and to raise stockpiles. That's bailing with a bucket full of holes.

Coin Toss

Everything seems oversold, positioning is out of whack and the bearish view is crowded. Look out for a couple of brutal short covering rallies ahead of the FOMC. It's a very, very busy week for the econ calendar with OPEC, ECB, Nonfarm Payrolls, ADP and ISM. Higher.