Gold
has been hammered lower in recent weeks by what looks like heavy
gold-futures selling. Normally these hyper-leveraged speculators’
positioning data crucial for gaming gold trends is reported weekly.
But unprecedentedly as far as I know, that has gone dark since late
January! The gold-futures trading bullying around gold prices is
now stealthed, which is troubling and likely contributed to gold’s
sharp selloff.
Just
a couple weeks ago, gold was thriving in a strengthening young
upleg. It had powered 20.2% higher in 4.2 months, hitting an
impressive $1,951 as February dawned! Gold’s January surge had left
it short-term overbought, so a healthy mid-upleg pullback was in
order to bleed off some of the mounting greed. That soon erupted,
but proved way more violent than usual. Gold plunged 4.4% in
just two trading days!
After weathering the last Fed rate hike just fine, early on February
2nd gold fell sharply. The European Central Bank’s latest
monetary-policy decision was more dovish than expected, hitting the
euro which boosted the US dollar igniting a 2.0% gold down day. As
the majority of those big losses cascaded in about a half-hour
after the ECB signaled a coming rate-hike pause, that looked like
big gold-futures selling.
Because of the extreme leverage inherent in gold futures, their
traders punch way above their weights in moving gold. Midweek specs
were only required to keep $7,400 cash margins in their accounts for
every 100-ounce contract traded, which controlled $183,870 worth of
gold. That enables maximum leverage of 24.8x! A week
earlier with margins lower and gold higher, 27.2x was the limit.
This ought to be criminal.
In
the stock markets, leverage has been legally capped at 2.0x since
1974 for good reason. The risks to both traders and efficient
markets are serious running extreme leverage. At 25x, a mere 4%
gold move against traders’ positions will wipe out 100% of their
capital risked! And at 25x, every dollar traded in gold futures has
25x the gold-price impact of a dollar invested outright!
This really distorts global gold markets.
Because gold-futures speculators run crazy leverage, their trading
time horizons are crazy-myopic. They can only care about what gold
is likely to do in coming minutes or hours. They frantically trade
on market developments that affect the US dollar’s fortunes, which
are their primary trading cue. Sharp gold drops on anything that
gooses the dollar nearly always result from big gold-futures
selling, usually on the short side.
Gold
started rallying back overnight into the 3rd, but suffered another
precipitous plunge in the wake of that Job Friday’s latest US
monthly jobs report. The US government claimed 517k jobs were
created in January, shattering the +187k expected with a
statistically-impossible eight-standard-deviation beat! That
left traders convinced the
Fed would have to
hike rates faster and farther, so the US Dollar Index soared.
Gold
plunged another 2.4% to $1,866 that day, with the lion’s share of
those losses snowballing within a half-hour after that jobs data.
Ironically that upside surprise was literally made up. The Bureau
of Labor Statistics’ own raw data in that very report actually
showed a staggering 2,505k US jobs lost in January! An epic
3m+ jobs seasonal adjustment was fabricated to conjure up that
massive politically-expedient beat.
As I
explained in an essay last week on
sharp gold
pullbacks being healthy, 4%+ two-day plunges aren’t that
unusual. They actually tend to happen a couple times a year or so,
driven by hyper-leveraged gold-futures selling. With their lack of
leverage and far-longer time horizons, investors don’t care about
short-term dollar volatility. During that latest gold plunge,
identifiable investment demand actually
rose slightly!
The
best high-resolution daily proxy for global investment demand is the
combined
gold-bullion holdings of the mighty American GLD and IAU gold
ETFs. They dominate that space, acting as conduits for the vast
pools of US stock-market capital to slosh into and out of gold.
During those two days where gold fell 4.4%, GLD+IAU holdings
actually enjoyed a small 0.2% build! Investors weren’t responsible
for gold’s plunge.
While annoying since it really distorts gold prices, normally
speculators’ collective gold-futures trading is soon disclosed.
Every Friday afternoon, the US Commodity Futures Trading Commission
publishes Commitments of Traders reports current to preceding
Tuesday closes. They reveal what specs as a herd are doing in gold
futures. Gold price action is highly correlated to their
super-leveraged buying and selling.
As a
professional gold-stock speculator and financial-newsletter guy for
decades now, there’s no data that I anticipate more than those
weekly CoTs. I devour specs’ latest positioning within minutes
after its late-Friday releases. But for the critical CoT week
leading up to early February’s violent gold plunge, that data wasn’t
published. That was really odd, since the CFTC has released CoTs
like clockwork since June 1962!
I
soon learned the CFTC had issued a notice the day before. A major
futures-clearing and data firm called ION Markets was hit by a
ransomware cyberattack. This Irish company is apparently essential
to the plumbing underlying global futures trading. With a sizable
chunk of ION’s servers inaccessible due to that event, many
automated futures-reporting functions were forced to go manual. So
the CoT data went dark.
The
CFTC warned “The ongoing issue is impacting some clearing members’
ability to provide the CFTC with timely and accurate data. As this
incident unfolded, it became clear that the submission of data that
is required by registrants will be delayed until the trading issues
are resolved. As a result, the weekly Commitments of Traders report
that is produced by CFTC staff will be delayed until all trades can
be reported.”
That
seemed reasonable, but no timeline was given for when “A report will
be published upon receipt and validation of data from those firms.”
Since this CoT data is so critical for so many major global markets,
I figured it would be a day late. But over a week later,
neither that data nor the following CoT week’s that encompassed
gold’s 4.4% plunge were reported! We need to see how much
gold-futures selling drove that.
Last
Friday the 10th, the CFTC issued another press release saying the
same thing. That was fully ten days after that January 31st attack
on ION! You’d think firms as important as it and its customers
would pull out all the stops, getting all hands on deck to manually
gather all that futures data if necessary. It was amazing US
futures regulators were tolerating companies still not reporting
that critical positioning data.
“Although the impact of the cyber-related incident at ION has been
mitigated, firms that are responsible for reporting are continuing
to experience some issues with respect to the submission of timely
and accurate data to the CFTC. As a result, the weekly Commitments
of Traders report, that is produced by CFTC staff, will continue to
be delayed until all trades can be reported.” Again no ETA on those
CoTs was given.
This
mess wasn’t just a gold-futures thing, it affected many futures
markets. According to the Financial Times, the day after that ION
cyberattack the US Treasury held meetings to assess whether that
posed a systemic risk to broader financial markets! And
speculators’ collective gold-futures trading going stealthed likely
exacerbated gold’s selloff. It cloaked how much gold-futures
selling they had done to hammer gold.
This
chart looks at gold prices superimposed over that weekly CoT data
during the last several years or so. Total spec longs and shorts
are rendered in greed and red respectively. Gold uplegs and
corrections are highly correlated with spec gold-futures buying and
selling. Material gold selloffs give up their ghosts as soon as
these hyper-leveraged traders have exhausted their very-finite
gold-futures selling firepower.
Unbelievably the last-available spec gold-futures-positioning data
is only current to Tuesday January 24th! ION’s servers were
taken offline due to its own negligence in hardening them the
following Tuesday the 31st. So there was no data to fill that next
CoT. Thus neither those speculators nor other traders know how
specs were positioned leading into gold’s February 1st interim high
of $1,951 before that selling hit.
Just
over a week earlier, specs collectively had 301.2k long contracts
and 120.6k short ones outstanding. Those numbers are meaningless
unless you are deeply immersed in ongoing CoT analysis. So to help
our newsletter subscribers quickly digest CoT trends, I recast
specs’ total gold-futures longs and shorts as percentages up into
their past-year trading ranges. Those constructs are
super-useful for trading gold stocks.
When
total spec longs near 0% up into their past-year range and total
spec shorts near 100% up into their own, spec selling is likely
exhausted. That means a gold trend reversal is highly probable,
a bounce to a big new rally. Once speculators have done all the
long dumping and all the short selling they are likely to do, all
they can do is buy. And that leveraged buying quickly catapults
gold sharply higher, like in recent months.
On
January 24th when gold closed at $1,937, total spec longs were 33%
up into their past-year range and total spec shorts were 32% up into
their own. That implied speculators still had room left to do about
one-third of their short-covering buying and two-thirds of their
long buying. Those are respectively the first- and second-stage
drivers of big
gold uplegs, fueling enough momentum to ignite stage-three
investment buying.
Interestingly during the following CoT week into the 31st, gold
actually slumped 0.5% to $1,928. It didn’t surge to that $1,951
high until after the next day’s Fed decision. So specs likely sold
some contracts in that week, which would’ve left their positioning
more bullish for gold with less selling firepower left.
Those GLD+IAU holdings only slipped 0.1% lower during that CoT week,
so identifiable investment selling was trivial.
During the subsequent CoT week into the 7th,
gold first surged 1.2% to that upleg high before plunging 4.4% over
the next couple trading days on that dovish ECB and epic US-jobs
seasonal adjustment. Gold exited that CoT week with a serious 3.0%
loss, implying big gold-futures selling. Investors didn’t
freak out, as GLD+IAU holdings edged up 0.1% during that
gold-slamming week. Those leveraged specs were to blame.
After decades of watching gold action all day everyday and analyzing
all following CoT reports, again that sharp selling on those couple
days looked like shorting. Triggered by those market events,
gold’s drops were sharper and more violent than those usually
associated with long selling. There’s no doubt that speculators had
to expend a significant fraction of their remaining selling
firepower to so hammer gold.
The
crucial question is how much? Where are specs positioned in gold
futures now relative to their past-year trading ranges? The answers
to these questions are essential to gaming when this gold pullback,
or possibly a larger correction, will end. But as long as the CFTC
is coddling ION and its customers and not demanding
legally-required CoT data, no one knows. That includes the
gold-futures speculators themselves!
With that extreme leverage they run, they live and die by the
sword. They can’t afford to be wrong for long or risk getting wiped
out. These guys watch the weekly CoT reports like hawks, well aware
of what they mean for gold price trends and reversals. I suspect
they’ve dumped more longs and added more shorts since
February 1st than they would’ve had they known how their peers were
collectively positioned.
The
more gold-futures contracts they sell, the less they have left to
sell going forward! That ups odds for a sharp gold reversal as
buying resumes. This chart shows the growing black hole in that key
CoT data since it was last reported current to January 24th. The
green spec-longs line likely fell in recent weeks as gold plunged,
while the red spec-shorts line likely surged sharply higher. I’m
dying to see the size of those moves.
Unfortunately we have no idea when the CFTC will resume publishing
the CoTs, including that back data. Later on Friday the 17th after
this essay was published, another CoT report current to Tuesday the
14th is due to be reported. If not, that will mark a scandalous
three CoT weeks in a row with no positioning data! Its
festering absence will cause gold prices to become even more
distorted, impairing market functioning.
Since speculators’ hyper-leveraged gold-futures trading is usually
the dominant driver of gold price action, I analyze every CoT in our
weekly and monthly subscription newsletters. I’m waiting with bated
breath to see the CFTC resume publishing that essential data. As
soon as it comes out, I’ll share its likely big gold implications
with our subscribers who pay the bills. It might even spook specs
into resuming their buying!
Again the more gold-futures selling they have done in recent weeks,
the less they have left to do. Their finite capital firepower
available for selling is exhausting! Unstealthing their
collective trading may prove a shock, as these guys realize their
likely selling has run its course so they rush to buy. That could
catapult both gold and its miners’ stocks sharply higher, ending
this anomalous selloff exacerbated by stealthed data.
Like
usual the biggest beneficiaries of a sharp gold reversal higher will
be the gold stocks. They were hit far harder than they should’ve
been in recent weeks as gold’s anomalous plunge gutted bullish
sector sentiment. Thus they are poised to roar back up in a
V-bounce mean reversion as gold’s selloff ends. So this outsized
gold plunge is a great mid-upleg opportunity to buy into gold
stocks at relatively-low prices!
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The
bottom line is speculators’ gold-futures trading that dominates gold
price action has been stealthed in recent weeks. A major futures
clearing firm suffered a ransomware cyberattack, taking down
automated data systems. Though resolved, US regulators responsible
for ensuring compliance have dawdled in demanding legally-required
CoT data essential for markets. That missing is increasingly
distorting gold prices.
Unaware of how much gold-futures selling they’ve done, specs don’t
know how much selling firepower is left. So they’ve been flying
blind, piling on to gold’s downside momentum with extreme leverage
which is super-risky. When the CoTs come back online and this
becomes apparent, it may spark a buying panic for these guys to
normalize their gold-futures bets. That would catapult gold and
gold stocks sharply higher. |