Gold has suffered
brutal, withering selling pressure in the month following the US
presidential election. The stock markets’ surprise surge after
Trump’s surprise win has led speculators and investors alike to rush
for the gold exits. As usual the former group’s extreme selling
came largely through gold futures. But this gold-futures dumping
has been so severe that it is rapidly exhausting itself, a bullish
omen for gold.
Gold’s stunning
post-election selloff resulted from a united mass exodus by gold’s
two dominant groups of traders. Speculators ferociously dumped gold
futures with an intensity rarely witnessed, while stock investors
jettisoned shares in the leading GLD gold ETF far faster than gold
itself was falling. With so much gold being spewed into the markets
so rapidly, this metal didn’t have a chance of staying on its feet.
Gold futures had
actually skyrocketed on election night, up 4.8% to $1337 as
Trump’s perceived odds of winning started to soar. But once the
plummeting stock markets rebounded violently, the gold selling
began. And it soon intensified after the election. Not only did
stock markets shockingly surge to new all-time record highs, but the
US Dollar Index blasted up to a major new 13.7-year secular high of
its own.
Gold has always
been a contrarian anti-stock trade. As a rare asset that
moves counter to stocks, gold’s critical investment demand is
heavily dependent on stock-market fortunes. Investors alternatively
flock to gold to diversify their stock-heavy portfolios when stock
markets fall, and then abandon it as stocks soar again. The
exceedingly-strong post-election stock markets swiftly slayed gold
investment demand.
Record
stock-market highs breed extreme euphoria and complacency. Traders
naturally start to believe stocks do nothing but rally
indefinitely. Thus their interest in deploying capital in
counter-moving gold fades to oblivion. And since investment demand
fueled the great
lion’s share of gold’s new bull market this year, this metal
couldn’t stand without it. Gold’s recent cratering resulted from
euphoric stock sentiment.
While speculators’
extreme gold-futures selling and investors’ extreme GLD-share
selling over the past month share the blame, that’s too much to
cover in a single essay. So this week I’m focusing on the
gold-futures side. While the massive post-election gold-futures
dump was miserably painful, it looks to be exhausting itself
which is very bullish. The finite supply of gold futures to sell is
rapidly dwindling.
Gold futures have
a wildly-outsized impact on gold prices, dominating
short-term action. Futures offer radical leverage far beyond the
decades-old legal limit in the stock markets of 2.0x. Every
gold-futures contract controls 100 troy ounces of gold. At $1175,
that’s worth $117,500. But the maintenance margin required to own
each contract is just $6000 this week, enabling maximum leverage
running way up at 19.6x!
And that’s
actually fairly modest for gold-futures trading, with 25x+ being
common when gold hasn’t just plunged. Even at 20x, each dollar of
capital speculators trade in the futures market commands 20x the
impact of a dollar invested in gold outright! So when
speculators as a herd aggressively buy or sell gold futures, the
gold price moves fast. Their collective amplified power to move
gold is immense and unparalleled.
Exacerbating their
utter dominance over this metal’s short-term fortunes is the fact
that gold’s reference price traders watch is that very futures one.
So when futures speculators bully gold around with their extreme
leverage, investors are quick to react which intensifies gold’s
moves. Contrarian investors have long decried this
blatantly-unfair-if-not-absurd gold-market structure granting
futures speculators such supremacy.
Further
complicating this whole messy situation, gold-futures speculators’
trading activities are obscured by low-resolution data. Not only
are their trades only reported once a week, but even that happens
with a 3-trading-day delay! This effectively hides what
gold-futures speculators are doing from wider scrutiny by investors
and analysts. This lack of futures transparency has long been a
serious problem for gold.
Because of gold
futures’ extreme inherent leverage, speculators must maintain an
ultra-short-term focus to survive. At 20x, a mere 5% adverse gold
move will wipe out 100% of their capital risked! So countless times
when gold-futures trading on mere herd sentiment drives big
gold moves, the day it happens the resulting volatile price action
is wrongly and falsely attributed to fundamental changes in the
world gold market.
Speculators’
collective gold-futures positions are published late every Friday
afternoon in the famous Commitments of Traders reports from the
CFTC. Those are already old though, current to the week that ended
the preceding Tuesday. Thus speculators’ market-moving gold-futures
trading activity is hidden for up to 8 trading days, which is
inexcusable in this information age. Maybe Trump’s people can fix
this.
So by the time
extreme gold-futures selling is unmasked, the resulting big gold
plunge has already long been wrongly attributed to fundamentals
which greatly damages sentiment for investors. This seriously
retards gold investment demand, creating a vicious circle where
selling begets selling. And that’s what has happened to gold in the
wake of the election. Gold selling is feeding on itself, driving
even more selling.
This first chart
looks at gold and its weekly gold-futures CoT data over the past
couple years or so. The total upside bets on gold by both large and
small speculators, gold-futures long contracts, are rendered in
green. Their total downside bets, short contracts, are shown in
red. Gold just suffered its third major plunge this year for the
same reason the first two happened, extreme selling by gold-futures
speculators.
This longer-term
perspective is essential for understanding what’s happened to gold
in the past month since the election. Note above how gold prices
are heavily positively correlated with speculators’ long
contracts in gold futures. When they collectively ramp up their
upside bets, gold surges higher. Then later when they sell these
ultra-leveraged longs, gold plunges. Nothing is more important for
short-term price action!
While speculators’
downside bets on gold through futures shorts are smaller, they have
the same gold impact but in the opposite direction. Gold
prices are heavily negatively correlated with speculators’
gold-futures shorts. When they effectively borrow gold they don’t
own to short sell it in the futures market, gold is pushed lower.
Later when they buy offsetting long gold-futures contracts to cover
their shorts, gold climbs.
In the
gold-futures market, the downside price impact of selling long
contracts and adding short ones is identical. Between January 2015
and December 2015, gold fell 19.3% largely because these futures
speculators sold 90.9k long contracts while adding 107.0k short
ones. That works out to the equivalent of 615.5 metric tons of
gold, nearly 1/5th of 2015’s total global mine production! That
can’t be absorbed fast.
Last year’s
intense gold-futures selling by speculators, much of which happened
on Fed-rate-hike
fears, ultimately pushed gold to a deep 6.1-year secular low a
year ago in mid-December. Gold bottomed the very next day after the
Fed’s first rate hike in 9.5 years, entering a new bull market that
flourished in much of 2016. By early July, gold had powered 29.9%
higher to hit its best levels seen in 2.3 years.
What helped fuel
gold’s strong new bull run in addition to
surging
investment demand? Heavy-if-not-extreme gold-futures buying by
the speculators! Over that span they added 249.2k long contracts
while covering 82.8k short ones. That works out to the equivalent
of 1032.6t of gold buying, nearly tripling the parallel
351.1t build in that GLD gold ETF’s physical gold-bullion holdings
over that same bull-market span!
Speculators’
enormous gold-futures buying pushed their long contracts to an
all-time record high 440.4k in early July. Right after that CoT
report was published, I wrote an essay warning about the resulting
record selling
overhang gold faced. While that was a hardcore contrarian
stance in the midst of gold’s mid-summer euphoria, if speculators
exited their record longs fast gold was threatened with a serious
selloff.
Amazingly part of
speculators’ mass exodus from their excessive gold-futures longs
tarried all the way until early November’s presidential election!
That’s pretty shocking, and I never would have predicted such an
unprecedented delay last summer. Overall between early July and the
latest CoT report, the speculators have sold 165.1k gold-futures
long contracts while adding 7.3k short ones. That’s serious
selling.
With each
gold-futures contract controlling 100 ounces of gold, speculators
have spewed the equivalent of 536.2 tonnes of gold into the
markets! And much of that slammed gold almost all at once following
the election surprise. Gold plunged after Trump’s win because
futures speculators ran for the exits. I really suspect the GLD
investors wouldn’t have fled in sympathy if futures speculators
hadn’t paved the way.
Thankfully this
extreme gold-futures selling looks wildly overdone. Speculators
hold only so many gold-futures long contracts, this supply of paper
gold is very finite. And once all the weak-handed traders
susceptible to being scared into selling low have largely exited,
this extreme futures selling will dry up. As this next chart
zooming in to the past year shows, odds are this gold-futures
selling is exhausting itself.
After speculators’
gold-futures longs hit their all-time record high in early July,
they surprisingly defied the odds to hold near those levels for
several more months. In the past big surges of long buying were
short-lived, soon collapsing. But there was a lot of conviction
gold’s young bull was heading higher, so speculators were loath to
sell. Until early October, when gold drifted below key $1300
support triggering stops.
Since gold futures
are so hyper-leveraged, speculators must run tight stop losses so
they aren’t quickly wiped out when gold moves against their bets.
So there was a huge cluster of long-side stops set right under
$1300. As the initial stops were triggered, the resulting selling
accelerated gold’s losses. This in turn tripped more stops,
exacerbating gold-futures selling. And the result was early
October’s mass
stopping.
That alone was an
extreme and rare event, and should’ve
flagged a major
bottom within an ongoing gold bull. And indeed it did for over
a month, with gold initially grinding higher along key support at
its 200-day moving average before surging into the election as
Trump’s perceived odds of winning grew. It’s hard to believe now,
but remember pre-election everyone feared a Trump win would
be disastrous for stocks!
But early the
morning after the election, stock-index futures started soaring.
One elite multi-billionaire investor had seen stock-index futures
limit-down at 5% losses, and left Trump’s party to deploy $1b into
stock-index futures in the middle of the night. Then Trump’s
victory speech was not only magnanimous, but he claimed Clinton had
called and conceded. Stock futures started to soar with no
contested election.
That’s when the
heavy gold selling started. After rocketing up nearly 5% on
election night on big safe-haven buying as stock markets burned,
speculators rapidly exited those gold-futures longs. In the first
full CoT week after the election surprise, they dumped a staggering
45.9k long contracts or nearly 1/7th of their entire
positions! That was epic, the 6th-largest long liquidation out of
933 CoT weeks since early 1999.
While that extreme
mass exodus from gold-futures longs abated to just 0.6K contracts in
the second CoT week after the election, it accelerated again in this
latest one. That was current to November 29th, which was the newest
CoT report available when this essay was published. Speculator long
dumping ramped right back up to 19.0k contracts, right on the edge
of the 20k+ contract single-week moves that are huge.
This resurgence in
speculators dumping gold-futures longs was likely due to the
outsized impact their earlier selling had on gold sentiment.
Unfortunately that initial massive wave of selling in the week right
after the election was wrongly interpreted at the time as gold’s
fundamentals deteriorating. That scared the institutional investors
owning GLD shares, so they started to exit en masse on bearish
futures-driven sentiment.
The heavy GLD
selling during Thanksgiving week as a result of the extreme
gold-futures selling the week before forced gold low enough to get
the gold-futures speculators fleeing again! This is a perfect
example of the selling-begets-selling vicious circle that sometimes
ignites in gold. In the 3 CoT weeks reported since the election,
speculators jettisoned 65.6k long contracts or nearly 1/5th of their
election-day bets.
But odds are this
extreme gold-futures selling is exhausting itself. Out of all the
gold-futures longs the speculators added in gold’s entire young bull
between last December and early July, a staggering 66.3% have been
unwound. Nearly 2/3rds of long-side gold-futures buying
fueling 2016’s gold bull has been reversed! That’s staggering,
leaving speculators’ collective upside gold bets at 275.3k contracts
per the latest read.
That’s really low
on multiple fronts. Speculators’ gold-futures longs have never and
will never retreat to zero, as there is always some base demand for
leveraged gold upside. During 2015 for example, deep in a major
bear where gold bearishness was epic, speculators’ gold-futures
longs averaged 223.2k contracts. That’s only 52.0k below current
levels, guaranteeing the lion’s share of the selling is behind us.
Assuming 2015’s
average long levels will be seen again, which is very unlikely in a
new gold bull, then over 3/4ths of the maximum total
speculator gold-futures long selling since early July’s peak upside
bets is behind us! But with gold still in a new bull market despite
the super-anomalous post-election plunge, longs almost certainly
aren’t heading all the way back to bear-market levels. That’s very
bullish for gold.
Speculators’
collective longs have fallen to a 9.0-month low, their worst levels
since early March before gold formally entered new-bull-market
territory at 20% gains off last December’s secular low. With such a
massive retracement already, it’s hard to imagine much more
selling. In most futures selloffs, early selling is the strongest
as stops are triggered and weak hands flee. Then selling moderates
once they’re out.
The only thing
that could potentially trigger more meaningful speculator
gold-futures long dumping is significant new gold lows. But with
gold pounded to a 10.1-month low this week, its worst levels since
way back in early February, fully 62.3% of this gold bull’s
progress has already been erased! It’s difficult to conceive of
enough new gold selling materializing to push this metal much lower
after such colossal technical damage.
And if
speculators’ extreme gold-futures long selling is exhausting itself
and largely over, then gold is going to stabilize if not start
marching higher. That will arrest the heavy differential GLD-share
selling in response to gold prices spiraling lower. So when
speculators cease dumping longs, odds are gold will carve a major
durable bottom. That’s likely happening now, and if not almost
certainly by next month at the latest.
But gold does
remain at risk of more gold-futures short selling. Since
early July, speculators’ total shorts merely grew by 7.3k
contracts. During this latest CoT week, they were only at 107.5k
which isn’t too far above their 95k-contract bull-market support
that has held strong since April. There are a couple potential
upside targets for new shorting if some catalyst spooks speculators
into believing gold is heading for a fall.
The highest spec
shorts have been since gold’s new bull market formally began in
early March is 122.7k contracts. That’s only 15.2k above the latest
CoT read, not enough to ignite a major new gold selloff unless all
this short selling happens within an hour or so. And in 2015, that
dark bear year of hyper-pessimistic gold sentiment, speculators’
shorts averaged 139.6k contracts. Even those levels aren’t
crazy-bearish.
Getting back to
there would require 32.1k contracts of new shorting, which isn’t
huge compared to the 172.4k contracts of gold-futures selling
already suffered since early July. The main potential catalyst for
big gold-futures shorting flaring again is next week’s FOMC
meeting. The Fed is universally expected to hike rates for the
first time in a year and the second time in 10.5 years, but that
rate hike won’t hammer gold.
This week
federal-funds futures are implying a 93% chance of a rate hike next
week, and it was way up at 99% as December dawned. So a rate hike
won’t surprise anyone, including speculators trading gold
futures. The big risk comes from the accompanying quarterly Summary
of Economic Projections, which shows where top Fed officials making
decisions expect the federal-funds rate to be in the coming years.
The last SEP, or
“dot plot”, in late September showed Fed officials forecasting two
rate hikes in 2017. Gold could see significant futures short
selling if that increases to three. But if the Fed indeed hikes
next week, it will have to be super-dovish in the rest of its
communications to avoid spooking stock markets. Thus it’s unlikely
a hawkish SEP would be published the same day, greatly lessening the
downside risk to gold.
Soon speculators
and investors alike will realize how radically oversold gold is, and
how anomalous its extreme post-election selloff was. These
record-high stock markets literally trading at bubble valuations
remain overdue to
roll over into a new bear no matter what Trump does. And his
proposed tax cuts and big government spending will ignite serious
inflation. All of that is very bullish for gold investment
demand!
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The bottom line is
speculators’ extreme gold-futures selling has been the dominant
driver of gold’s steep post-election plunge. Their near-record rush
for the exits blasted gold lower so fast that investors were spooked
into fleeing. But speculators’ epic futures long liquidation that
crushed gold sure looks to be exhausting itself. So many
gold-futures longs have been dumped that there simply aren’t many
left to sell.
And once
speculators’ aggressive gold-futures selling ceases, gold prices
will stabilize which will arrest the parallel investor selling.
That decisive bottoming will pave the way for gold’s young bull
market to resume. Investors will soon realize their radical
underinvestment in gold isn’t very wise, especially with
wildly-overvalued stock markets trading at euphoric record highs.
New investment demand will propel gold far higher. |