Gold’s powerful post-stock-panic upleg hasn’t enjoyed buying support
from the gold-futures speculators. These influential traders often
drive and even dominate major gold-price trends. But they’ve been
subtly selling into gold’s sharp recent rally. Their dogged
skepticism is actually very bullish for gold in coming months.
Gold-futures speculators are amassing big gold-futures-buying
firepower that will be unleashed.
The
maelstrom of extreme fear spawned by mid-March’s stock panic even
briefly sucked in gold. It had surged to a 7.1-year secular high of
$1675 during the initial weeks of that heavy stock-market selling.
But once that went panic-grade, which is major stock indexes
plummeting 20%+ in 2 weeks or less, even gold was dumped in the
frantic dash for cash. Similar to prior panics, gold plunged 12.1%
in just 8 trading days.
But
that sharp emotional drop was wildly-unjustified fundamentally.
With stock markets burning and the Fed printing crazy-record sums of
new money like there’s no tomorrow, gold should’ve been soaring. So
it rapidly V-bounced out of that anomalous stock-panic low, to blast
much higher over the next couple months. Between mid-March to late
May, gold surged up 18.7% to a 7.5-year secular high near $1748.
Surprisingly the gold-futures speculators didn’t participate in
that at all! Usually it’s their buying that births major gold
uplegs, first short covering and later adding new long positions.
Over a few months or so that drives gold high enough fast enough to
convince investors to start returning. Gold-futures buying acts
like the starter that gets the far-larger gold-investment-buying
engine running. But specs have been missing in action.
Gold-futures speculators wield a majorly-outsized impact on
gold prices, so their trading is very important to watch. That
comes from a couple unique attributes of the gold-futures market.
First it allows extreme leverage vastly larger than any other gold
market, amplifying the gold-price impact of gold-futures trading.
Second, the resulting gold-futures price is gold’s world reference
one that has universal psychological influence.
Since the mid-1970s, the legal limit of leverage in the stock
markets has been 2.0x. Stock traders can only use 50% margin at
most. Futures trading allows radically more. As of the middle of
this week, each gold-futures contract controlling 100 ounces of gold
only required specs keep a maintenance margin of $9,150 cash in
their accounts. Yet at $1725 gold, each 100-ounce contract controls
$172,500 worth of this metal.
That
makes for extreme maximum leverage of 18.9x! Amazingly
that’s actually really low for gold futures. My last essay on this
topic in late February warned about
gold’s peculiar
surge that was looking toppy at the time. At that point
maintenance-margin requirements were much lower so the maximum
leverage that gold-futures speculators could run was 32.0x. That’s
way closer to historical norms than today’s levels.
Nevertheless even at 19x, every dollar gold-futures speculators
deploy has 19x the gold-price impact of a dollar invested
outright! That extreme leverage is certainly risky, as a mere 5.3%
adverse move against specs’ positions would wipe out 100% of their
capital deployed. Cash margins were likely raised because
gold-futures prices were disconnecting from physical gold prices in
the weeks after mid-March’s stock panic.
At
one point in late March, gold-futures prices were $105 per ounce
over spot prices! That appeared to be mostly a COVID-19 thing.
Just across the border from hard-hit northern Italy, in Switzerland
3 of the world’s largest gold refiners suspended operations. Air
travel to move gold bullion around was heavily restricted too.
Those disruptions seriously decoupled gold-futures prices from the
underlying physical market.
That, along with huge gold volatility during and after the
stock panic, greatly upped the risks of defaults by gold-futures
speculators. So margins were nearly doubled, nearly cutting maximum
leverage in half. But still these influential traders punch far
above their weights, moving gold prices far more than their capital
would support at stock-market types of leverage. 19x amplification
leaves them a force to be reckoned with.
And
specs bullying the gold price around heavily impacts overall gold
sentiment. Everyone else watches the gold-futures price, it is
the world reference one. That makes gold-futures trading often act
like the tail wagging the gold-investment dog. Specs’ collective
trading heavily influences investors’ bullishness or bearishness on
gold, and thus their buying and selling. Investors often follow the
gold-futures price’s lead.
Speculators’ aggregate gold-futures trading is disclosed weekly
in the famous Commitments of Traders reports. They are published
late Friday afternoons by the US Commodity Futures Trading
Commission, the futures regulators. All speculators and investors
alike interested in gold, silver, or their miners’ stocks need to
follow this essential CoT data. And what it has revealed since
mid-March’s stock panic is stunning!
This
chart superimposes gold prices and technicals over speculators’
total long and short contracts in gold futures. Their upside bets
or longs are rendered in green, and their downside bets or shorts
are shown in red. Very unusually they’ve been sitting out
gold’s powerful post-panic upleg, and subtly betting against it!
This surprising development is a big reason why gold continues to
look so bullish even after surging.
 
Heading into mid-March’s stock panic, gold had powered 42.7% higher
over 18.8 months in the biggest upleg of its secular bull. The
primary driver of that was heavy gold-futures buying by the
speculators. In that span, they added 170.3k long contracts while
buying to cover another 173.3k short ones. That made for enormous
total buying of 343.7k contracts. That’s the equivalent of a
colossal 1068.9 metric tons of gold!
For
comparison consider the identifiable gold investment demand during
that same upleg. As discussed last week in my latest essay on
strong gold
investment, the best daily proxy for gold investment demand is
the holdings of the dominant GLD SPDR Gold Shares and IAU iShares
Gold Trust gold ETFs. During that same gold-upleg span, their
physical gold-bullion holdings only grew a much-smaller 190.4t and
123.8t.
These massive American gold ETFs that together commanded 42.7% of
all the gold bullion held by all the world’s gold ETFs at the end of
Q1 only saw a total 314.2t holdings build during this gold bull’s
biggest upleg. That’s well under a third of specs’
gold-futures buying! Their hyper-leveraged trading really moves
gold, as is readily apparent in the rest of this gold bull. Check
out its major uplegs and corrections in this chart.
Prior to this stock panic fueled by the economic devastation from
governments’ draconian lockdowns to slow the spread of COVID-19,
spec gold-futures trading drove all the major gold uplegs and
corrections. 331.9k contracts of buying helped catapult gold 29.9%
higher in this bull’s maiden upleg mostly in the first half of
2016. 190.3k contracts of selling blasted gold 17.3% lower in the
major correction following that surge.
The
spec gold-futures buying greatly moderated to just 84.7k contracts
in this gold bull’s second upleg straddling 2017, resulting in a
way-smaller 20.4% gold gain. Spec gold-futures selling resumed with
a vengeance after that, with 227.2k contracts of selling hammering
gold 13.6% lower into summer 2018. Then that biggest upleg was
born, again 343.7k contracts of spec gold-futures buying blasted
gold 42.7% higher!
These leveraged traders’ buying grew so extreme in late February
that their total longs soared way up to an all-time-record high
of 473.2k contracts! That anomaly actually proved really fortuitous
for prudent traders watching this data. Again I wrote about
gold’s peculiar
surge at the time, pointing out specs were all-in gold. They
had effectively run out of room to add more longs, and run out of
room to cover more shorts.
Total spec longs and shorts were running 100% and 6% up into their
gold-bull trading ranges then. That was close to the
most-bearish-possible read for gold of 100% longs and 0% shorts.
That implies specs’ available capital firepower to buy more longs
is exhausted, making big selling far more likely. And with very-low
shorts, they can’t do much more short-covering buying either.
That’s really bearish for gold.
So
in February we not only recommended our newsletter subscribers
liquidate all their gold-stock trades, but we added put options and
inverse-leveraged-ETF trades actively shorting them. That
proved super-fortunate soon after when that inherently-unpredictable
stock panic arrived. While no one could’ve foreseen that extreme,
spec gold-futures positioning had pointed to an imminent major
correction in gold.
Heavy spec gold-futures selling played a role in hammering gold in
mid-March, as during that brutal 8-trading-day span where gold
plummeted 12.1% specs dumped 49.3k gold-futures contracts. I
suspect their actual selling was bigger, but is hidden behind the
coarse weekly resolution of the CoT reports. Gold plummeted and
then V-bounced within a single CoT week, masking individual
trading days’ gold-futures action.
But
what speculators have been doing in gold futures since gold’s
V-bounce is remarkable. Note in this chart that while gold has
spiked sharply, total spec longs didn’t follow! Gold surged 18.7%
without the speculators buying any gold futures! From gold’s
panic low to its latest interim high in late May, total spec longs
actually fell 13.5k contracts while shorts slipped 2.0k. That makes
for 11.5k contracts of net selling.
Gold-futures speculators have sat out this entire post-stock-panic
gold upleg so far! The latest CoT data before this essay was
published is current to June 9th. At that point total spec longs
were running just 318.9k contracts. Major gold uplegs are slain by
excessively-bullish spec gold-futures positioning. That
turned out to be the then-record 440.4k longs in July 2016 and the
new-record 473.2k in February 2020.
The
current spec-long positioning is still 121.5k contracts under the
former and 154.3k under the latter! Average those differences, and
specs still have room to buy another 137.9k long contracts
before this gold upleg is forced go give up its ghost on spec buying
exhaustion. That’s the equivalent of 428.9t of gold, which is big!
The total GLD and IAU buying in this post-panic upleg have been
190.1t and 54.5t.
Today’s total spec longs are only running 46% up into their own
trading range since this secular gold bull was born in mid-December
2015. That’s closer to the most-bullish-for-gold 0% longs than the
opposite most-bearish-for-gold 100% longs. And if you look at total
spec longs compared to where they’ve been during the past year, they
are 0% up into their 52-week range! Specs have lots of room yet to
drive gold higher.
This
gold upleg is highly unlikely to fail before specs are all-in, and
they have major buying left to do from here to get there! Their
lack of psychological and actual buy-in to this gold upleg after
such a big gain is amazing. Usually once gold investment buying
gets underway, spec gold-futures buying has largely been expended.
But today specs’ capital firepower for buying is still mounting,
which is a very-bullish omen for gold.
Realize spec short positioning is nowhere near as bullish. While
spec shorting has ramped a bit out of its deep 8.2-year secular low
in late April, total spec shorts are still just running 13% up into
their gold-bull trading range. That’s bearish for gold, close to
the most-bearish-possible 0% which means specs are all-out shorts
with vast room to short sell aggressively. But this is a secondary
consideration today for a few reasons.
Because hyper-leveraged gold-futures trading is so exceedingly
risky, speculators don’t want to bet too big against gold near major
highs. After this gold bull’s fast maiden upleg into the summer of
2016, there was no significant new short selling even as gold
corrected hard on heavy long dumping. Specs don’t get bold on short
selling until many months after gold sees new highs. Bearish-enough
psychology is slow to build.
In
terms of their more-recent past-year trading range, total spec
shorts look much higher at 50% up into it. That’s right between
that most-bearish-possible-for-gold 0% and the most-bullish-possible
100%. But the primary reason I’m not concerned about today’s low
spec shorts is purely mathematical. Note in this chart how much
higher the green spec longs line is almost always compared to the
red spec shorts one.
During this entire secular gold bull, the weekly total spec longs
and shorts have averaged 313.2k and 120.6k contracts. With 2.6x
more longs, they are 2.6x more important for moving the gold
price than shorts! The gold-price impact of buying or selling a
long or short contract is identical. And with specs’ upside bets
usually running multiples higher than their downside ones, how they
trade longs has a bigger impact.
With
gold-futures speculators refusing to participate in gold’s sharp
post-panic upleg so far, why can gold still power higher? The
reason is strong
investment demand, which I discussed in depth in last week’s
essay. This updated chart from there shows this gold bull
superimposed over GLD’s holdings. Gold’s exact-same uplegs and
corrections are noted, so you can compare gold-futures action to
investment buying.
Gold
investment demand has exploded since the stock panic, which
is what has catapulted gold 18.7% higher at best so far. During
that same young-upleg span where speculators sold 11.5k contracts of
gold futures, GLD’s holdings surged 20.6% or 190.1t higher! IAU’s
parallel build was 14.3% or 54.5t. Between the panic’s heavy
psychological damage and the Fed’s colossal inflation since,
investors are flocking to gold.
For
years after the shocking plummetings of stock panics, investors
remember that stock markets fall as well as rise. So they up their
allocations in gold to prudently diversify their stock-heavy
portfolios. And as of mid-June, the Fed’s balance sheet has
skyrocketed 66.3% or $2,857.0b higher in just 3.0 months since that
stock panic! Gold has never been more important to own with the
US-dollar supply soaring by 2/3rds.
Consider a final measure of investment buying versus gold-futures
trading. Instead of running from the stock-panic low to gold’s
latest interim high in late May, extend that span out to the middle
of this week. In that 3.0-month timeframe, GLD’s holdings have
soared by 23.2% or 214.0t. IAU’s are up 17.3% or 66.0t. That makes
for a hefty 280.0t of identifiable gold investment buying since gold
suffered its stock-panic nadir.
That’s already almost as much gold investment as that 314.2t total
holdings build of GLD and IAU during gold’s entire prior 42.7% upleg
over 18.8 months into late February! Meanwhile total spec longs
have plunged 49.8k contracts in this extended span, while their
total shorts have climbed 8.4k. That makes for total selling of
58.3k, the equivalent of 181.2t of gold. That has offset nearly
2/3rds of the investment buying.
That’s the main reason why gold has consolidated high since late
May, spec gold-futures selling has been warring with investment
buying. Imagine how this gold upleg will accelerate once
speculators decide to stop fighting it and pile in. That will
probably happen fairly soon, as all gold-futures speculators can
care about given their leverage and risks is correctly riding
short-term trends. And gold’s inarguably remains higher.
After the last stock panic in late 2008, gold investment demand
remained elevated for years. That helped push gold 166.5%
higher in the 2.8 years after that panic’s bottoming. So this
latest 18.7% upleg over 2.0 months is nothing so far. Gold has a
lot higher to run yet before investors get sufficiently diversified
and the traumatic memories of the stock panic fade. Gold-futures
speculators will throw long amplifying those gains.
The
biggest beneficiaries of post-stock-panic gold bulls are the stocks
of its miners. After that late-2008 stock panic, the leading GDX
VanEck Vectors Gold Miners ETF soared 307.0% higher over the next
2.9 years! The major gold stocks tend to amplify gold’s upside
by 2x to 3x, while the smaller fundamentally-superior
mid-tier gold
miners fare even better. So if you are bullish on gold, you
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To
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this major upleg runs again.
The
bottom line is gold-futures speculators haven’t been participating
in gold’s strong post-panic upleg so far. These influential traders
who often dominate gold’s price action through extreme leverage not
only haven’t been buying, they’ve been modest sellers. Their
skepticism apparent through their positioning is the reason gold has
consolidated high. But their selling is building up their capital
firepower for later buying.
As
strong investment demand continues pushing gold higher on balance,
sooner or later the gold-futures speculators will join in to ride
this upleg. Their current lukewarm positioning leaves big room to
buy, which will really amplify gold’s coming gains. This gold upleg
isn’t in danger of failing until these traders’ bets grow
excessively-bullish again. The long buying runway before that is
very bullish for gold and gold stocks. | 
