Gold
plummeted last Friday, dragging silver and their miners’ stocks down
with it. That was reminiscent of another brutal down day in early
November. While certainly uncommon, sharp selloffs naturally freak
out traders crushing any bullish sentiment. Serious gold down days
are nearly always driven by heavy speculator selling in
super-leveraged gold futures. The risk of that erupting depends on
their positioning.
A
week ago on Jobs Friday, gold collapsed an ugly 3.5% to $1,847!
Those monthly US jobs reports are the most-important economic data
in terms of market-moving potential. So there are much-higher odds
of big gold swings in the wake of those nonfarm-payrolls numbers.
The jobs situation tends to move gold because it affects traders’
perceptions of what the Federal Reserve might do next in terms of
monetary easing.
Gold
normally reacts to payrolls coming in significantly different than
expectations. A big upside surprise in monthly US jobs often leads
to gold-futures selling, as that implies the Fed won’t be as
aggressive with easing. And a major miss usually ignites sizable
gold buying, as traders assume that implies a weaker US economy
forcing the Fed’s hand to print more money. So last Friday’s data
should’ve ignited a gold surge.
Economists expected US jobs growth to be weak in December, looking
for a paltry +50k. But the actual came in much worse at -140k!
Normally gold would’ve rallied 1% to 2% on such a rotten number. So
its 3.5% plunge that day was definitely an anomaly. Despite
happening on a Jobs Friday, that data was only partially
responsible. Gold trades overnight around the world, and suffered
big losses before that report.
The
prior afternoon, gold ended the US trading day near $1,915. But
overnight in late Asian trading while Americans were asleep, gold
plunged sharply from around $1,909 to $1,885. Gold drifted a bit
lower in the European session, re-entering US trading at $1,882 that
Friday morning. So half of gold’s Jobs-Friday losses had
already accrued well before that latest jobs data. That big
downside surprise was indeed bullish.
Gold
rebounded back up to $1,891 in that release’s immediate wake. But
gold-futures speculators were spooked with the psychologically-heavy
$1,900 level failing overnight. So they sold that bounce to pummel
gold all the way down to $1,830 by early afternoon! While it
recovered to $1,847 at the US close, that was still that 3.5% loss.
Silver and the main GDX gold-stock ETF plunged 7.0% and 4.8% in
sympathy.
While startling sentimentally, those sharp selloffs did not torpedo
recent newer uptrends in the precious metals.
Gold stocks’
major upleg breakout evident in GDX, which I discussed in last
week’s essay written the day before Jobs Friday, stayed intact.
Gold, silver, and their miners’ stocks remained in what still look
like young bull-market uplegs technically. Their series of
higher lows and higher highs survived that rout.
A
few days earlier in our weekly newsletter, I warned subscribers a
sharp gold selloff remained a real threat. “A snowballing
gold-futures-longs mass exodus is still the biggest near-term risk
gold faces, so we must stay wary.” If you understand and follow
speculators’ collective gold-futures positioning, then sharp gold
selloffs won’t scare you into making hasty emotional trading
decisions that end up proving poor ones.
Speculators’ gold-futures trading is gold’s dominant short-term
driver. Whenever gold sees a big daily swing up or down, it is
usually the result of spec gold-futures action. Futures trading is
way different from stock trading, because of its extreme inherent
leverage. That greatly multiplies the gold-price impact of futures
speculators’ capital, enabling it to often become the small tail
that wags the far-larger gold-price dog.
Each
American COMEX gold-futures contract controls 100 troy ounces of the
yellow metal. At $1,850 gold, that’s worth $185,000. But this week
speculators are only required to hold $10,000 cash in their accounts
for each gold-futures contract they trade. That enables them to run
maximum leverage way up at 18.5x. Every $1 they deploy can
have the same affect on gold as fully $18.50 bought or sold
outright!
And
that’s actually pretty low for this wild-west realm. Gold-futures
margins get raised when gold prices are volatile, to lower the risks
of traders not being able to make good on their contract
commitments. For years, maximum gold-futures leverage for
speculators ranged from 25x to 35x! With extreme leverage comes
extreme risk, forcing gold-futures traders to be ultra-myopic for
the time horizons they operate in.
A
big gold down day like last Friday’s 3.5% plummeting is a manageable
3.5% loss for investors using no margin. But at 18.5x leverage,
that is multiplied to 64.8%! Imagine being long gold futures to the
hilt and seeing nearly 2/3rds of your capital deployed obliterated
in a matter of hours. When gold starts selling off materially for
any reason, gold-futures speculators have to quickly pile on to
avoid catastrophic losses.
That’s true regardless of the sparking catalyst. There were a few
potential ones late last week leading into Jobs Friday. The US
stock markets had just surged to another all-time high, weakening
demand for alternative investments lead by gold. Bitcoin, which
millennials and some institutional investors view as digital gold,
had skyrocketed 35.8% to dazzling record highs in just four
trading days stealing the limelight!
And
10-year US Treasury yields were soaring with Democrats taking the
Senate and gaining full control of the US government. The prospects
of trillions of dollars of more government spending drove a big bond
selloff, catapulting 10y yields from 0.91% to 1.11% last week
alone! Those higher yields were lighting a fire under the US Dollar
Index, which is the main indicator gold-futures speculators watch
for trading cues.
I
suspect this latter dynamic was what unleashed the gold-futures
selling in Asia heading into Jobs Friday. And once it started, it
cascaded like usual since traders can’t afford to be wrong for long
in exceedingly-unforgiving gold futures. So by the time the dust
settled that day, gold had been pummeled that 3.5% lower sucking in
silver and their miners’ stocks. Only gold-futures selling can yank
gold prices down so fast.
Unfortunately speculators’ gold-futures positioning is only
published weekly, late Friday afternoons but just current to
preceding Tuesday closes. So when this essay was published, the
latest Commitments of Traders report illuminating that Jobs Friday
episode still hadn’t been released. But gold can’t plunge so
sharply without heavy spec gold-futures selling. Another major
indicator helped confirm that last Friday.
Over
the longer term, gold’s dominant primary driver is investment
flows. Investors control vast pools of capital radically
dwarfing what the gold-futures speculators can wield. So while
frenzied bursts of super-leveraged gold-futures trading can
temporarily overwhelm gold prices, investment is ultimately way more
important. Despite that Jobs-Friday plunge, gold’s most-important
investment vehicles showed no selling.
Those are the American GLD SPDR Gold Shares and IAU iShares Gold
Trust gold ETFs. The former’s gold-bullion holdings held in trust
for its shareholders were dead-flat that day, while the latter’s
edged up 0.1%. A couple weeks ago I wrote an essay on recent
slowing gold-ETF
selling, a very-bullish omen upping the odds a new gold bull
upleg is underway. GLD and IAU saw no differential selling
as gold dropped 3.5%.
As
the fuel that drives sharp gold selloffs is speculator gold-futures
positioning, that also governs the risks of those events happening.
If these traders’ collective gold-futures long contracts are high,
and/or their short contracts are low, a big gold down day could
erupt anytime. I’d been warning our subscribers about this mounting
risk for weeks before Jobs Friday, as our newsletters analyze every
weekly gold-futures report.
This
chart superimposes gold prices over total spec longs and shorts
during the past couple years or so. Gold uplegs and corrections are
marked, along with the changes in spec longs and shorts over those
exact spans. The full trading ranges of spec longs and shorts
during this entire secular gold bull since mid-December 2015 are
also shown. Speculators’ gold-futures positioning has been
excessively-bullish.
In
the last CoT report before gold’s Jobs-Friday plummeting, total spec
longs were running way up near 411.7k contracts. That is relatively
high compared to their gold-bull trading range, which spanned from
186.7k in late December 2015 to 473.2k in mid-February 2020.
Normally speculators sell down their long contracts during gold
corrections, paring back their leveraged upside bets. But they
didn’t during gold’s latest.
That
started in early August, after gold had rocketed 40.0% higher out of
deeply-oversold stock-panic lows last March. Gold had shot
parabolic on
enormous investment capital inflows into GLD and IAU, spawning
dangerous euphoria. So a healthy correction was in order to
rebalance both sentiment and technicals, paving the way for gold’s
next bull upleg. I warned about this
imminent
correction risk in late July.
Indeed gold retreated 13.9% over the next 3.8 months into late
November. That proved right in line with this secular bull’s prior
corrections which had averaged 14.3% losses over 4.1 months. But
despite that selloff largely driven by differential selling of GLD
and IAU shares, gold’s decline was gradual enough to avoid
spooking gold-futures speculators. So they merely sold 3.6k long
contracts during that correction span.
That
left their leveraged gold upside bets relatively high, with total
spec longs 4/5ths up into their gold-bull trading range leading into
Jobs Friday. So whenever the right catalyst came along, with
a US dollar rally
being the most-likely one, cascading gold-futures selling
hammering gold lower was a real risk. And that is almost certainly
exactly what happened a week ago, which should be confirmed by this
week’s new CoT.
Excessively-bullish upside bets spawn gold-futures-selling
overhangs. I think of these like the windblown-snow cornices
that crown the high ridges of the Colorado mountains in the winter.
Most of the time they do nothing, but all that heavy packed snow has
great potential energy. That can be suddenly released in avalanches
when just the right conditions of snow consistency and density,
temperature, and wind arise.
Like
snow cornices at elevation, high spec gold-futures longs aren’t
inherently risky. Sometimes they stay high, or gradually shrink
with little fanfare like sublimating or melting snow. But when the
right catalyst hits at the right time, all that potential
gold-futures selling can be suddenly released igniting a snowballing
avalanche of selling. That bashes gold sharply lower whenever it
happens, both in uplegs and corrections.
My
decades of gold-futures research necessary to profitably trade
high-potential gold stocks has led me to view 400k+ spec
gold-futures longs as the danger zone. The higher those
collective upside bets get, the more likely they are going to
collapse into cascading selling. And for three CoT weeks in a row
before Jobs Friday, total spec longs exceeded 400k at 408.7k,
400.5k, and 411.7k contracts. That demanded caution.
But
that static threshold is simplistic within the context of a longer
secular gold bull. The more years that gold marches higher on
balance, the more bullish everyone gets including gold-futures
speculators. They are less inclined to liquidate their longs back
down to early-bull levels after gold has established a long track
record trending higher. So spec longs’ relevant trading range
likely climbs in its own uptrend parallel to gold.
Leading into Jobs Friday, spec longs’ bull support line had risen up
near 355k contracts. That left room for about 57k of selling on the
right catalyst. Anything over 20k in any single CoT week is huge,
forcing gold sharply lower. I can’t wait to see total spec longs
when the new CoT report straddling Jobs Friday is finally released
late this afternoon. Were those long liquidations large enough to
slash that overhang risk?
Total spec shorts work similarly, but in the opposite way. Adding a
new gold short has the same gold-price impact as selling an existing
long, while buying to cover a short is functionally identical to
adding a new long. But spec shorts overall are proportionally
less important to gold since there are usually way fewer of
them. Ahead of Jobs Friday, total spec shorts of 90.8k contracts
were just over 1/5th of total longs.
During this secular gold bull, speculators’ gold-futures shorts have
run in a gigantic range between 47.8k in late April 2020 to 256.7k
in mid-August 2018. But like longs, the deeper into a gold bull
speculators get the less motivated they are to put on leveraged
gold-futures shorts. So total spec shorts have seen a declining
bull-resistance line in recent years, which was running near 105k
contracts before Jobs Friday.
So
before $1,900 gold failed overnight in Asian trading late last week
prior to the latest monthly jobs read, specs had room to short sell
another 14.2k contracts. While they are forced to pile into long
liquidations during sharp gold selloffs to mitigate catastrophic
losses, adding new shorts is optional. With Fed money printing out
of control and government spending soaring, specs likely aren’t too
keen on downside gold bets.
So
last Friday’s sharp 3.5% gold plummeting hammering the entire
precious-metals complex lower was almost certainly the result of a
major spec gold-futures-long liquidation. These traders were
forced to quickly pare their relatively-high gold-bullish bets, and
that selling cascaded. The more traders decide to dump gold-futures
longs, the faster gold’s price falls. The lower gold goes, the more
traders are forced to sell.
This
self-reinforcing vicious circle amplifies gold-futures-driven gold
plunges until specs have sold enough to suitably reduce their
leveraged downside risks. Then like an avalanche sliding to a halt
after all that snow’s kinetic energy is spent, the snowballing
gold-futures selling also runs out of momentum. Then gold prices
stabilize and the yellow metal resumes whatever trend it was in
before that gold-futures selling erupted.
Whether you trade or invest in gold or silver, gold- or
gold-stock-ETF shares, or shares in individual gold and silver
miners, it is really important to stay abreast of speculators’
collective gold-futures positioning. Watching their bets as a herd
is like an early-warning system for big gold surges and plunges,
which both silver and their miners’ stocks amplify. It reveals when
sharp futures-driven gold moves are most probable.
Knowing such violent gold-price swings are likely before they happen
really helps traders keep their own greed and fear in check. Before
gold plunged 3.5% out of the blue on Jobs Friday, our subscribers
were well aware a gold-futures-selling overhang existed that could
be triggered any time. So they didn’t panic sell when it
came to pass, with their gold-stock and silver-stock trades
protected by loose trailing stop losses.
Despite gold, silver, and GDX plunging 3.5%, 7.0%, and 4.8% that
day, no stop losses were tripped in our many new gold-stock and
silver-stock trades to ride this sector’s young bull upleg. That
now includes 12 trades in our weekly newsletter and 6 in our monthly
added since late November. Their unrealized gains continue to
gradually grow on balance, despite the periodic gold selloffs
inevitable in all bull uplegs.
Knowledge and perspective are absolutely essential to multiplying
wealth through stock trading. And specs’ gold-futures trading as a
herd can really bully gold prices around when it grows frenzied.
That doesn’t last for long since these guys’ capital firepower is
relatively small and limited, but the resulting gold swings really
affect sentiment and trading decisions. Not watching spec
gold-futures positioning is flying blind.
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The
bottom line is gold’s sharp Jobs-Friday plunge was fueled by
cascading gold-futures selling by the speculators. Their collective
upside bets were relatively high heading into that day, with total
longs above the gold-futures-selling-overhang threshold. So when
gold started selling off overnight well ahead of that US jobs
report, these traders were forced to liquidate leveraged longs en
masse or face catastrophic losses.
The
resulting gold plunge suffered no identifiable differential gold
investment selling. And that snowballing gold-futures selling
quickly exhausted itself, enabling gold prices to stabilize this
week. So gold’s young-upleg uptrend in place before that frenzied
long liquidation should resume. That portends gold prices climbing
again on balance, leading to outsized gains in
fundamentally-superior gold-mining stocks. |