Gold
has been afflicted by relentless selling over the past few weeks or
so, forcing it to major lows. While summer-doldrums weakness is
typical, gold’s recent drop is on the large side even for this time
of year. It was fueled by truly-extreme short selling by
gold-futures speculators, which is quickly exhausting. That is
paving the way for gold’s major autumn rally to start marching
higher any day now, a very-bullish omen.
A
month ago when gold was still near $1300, I published my latest
research on its summer doldrums. The first halves of market summers
including Junes and early Julies have long tended to be the
weakest times of the year seasonally for gold. They are simply
devoid of the recurring seasonal demand surges gold enjoys during
most of the rest of the year. With investors not interested in
buying, gold languishes.
There are no major income-cycle or cultural drivers of outsized gold
investment demand during these vexing summer doldrums. And many
investors are mentally checked out anyway, enjoying the summer
vacation season with their families. So gold usually drifts
listlessly sideways to lower in early summers. Sometimes enough
bearishness coalesces to catalyze significant selling, which is
certainly the case this year.
This
first chart is updated from my recent
summer-doldrums
essay, revealing how gold has performed in market summers in
modern bull-market years. They run from 2001 to 2012, skip over the
intervening bear years of 2013 to 2015, then recommence in 2016 to
2018. Because gold’s price varied so greatly over this span, all
individual years’ summer price action is indexed to 100 as of Mays’
final closes each year.
The
individual summer trading patterns of all these bull-market years
from 2001 to 2017 are rendered in yellow. Together they define
gold’s typical summer trading range. They are all averaged together
in the red line, distilling down gold’s core seasonal tendencies.
Then superimposed over the top of all that in blue is gold’s current
price action in 2018. After a typical summer start, gold took a
sharp turn for the worse.
Market summers
deviate from true orbital summers, running June, July, and August
proper. Traders likely think this way because of the major vacation
weekends bracketing these summer months in the US. So gold’s last
close in May is the entry point off which summer price action is
measured. That’s recast at 100 in this chart to keep all modern
bull-market years’ price action perfectly comparable in percentage
terms.
On average between
2001 to 2012 and 2016 to 2017, from late May to mid-June gold
slumped 1.0% to its major seasonal summer-doldrums low. From there
gold tended to start recovering, leaving June with modest average
losses of 0.2%. This first-half-of-summer weakness usually passes
by mid-July, so that month saw solid average gains of 0.9%. Those
are driven by gold’s major autumn rally getting underway.
As that gathers
steam with investors refocusing on markets following vacations,
August actually averaged hefty 2.2% gold gains! So technically the
summer doldrums encompass the first 5 to 6 weeks of market
summers, all of June and early July. Thus we ought to be through
the worst of gold’s seasonal weakness this summer. That’s even more
likely considering how much gold fell below its early-summer mean so
far in 2018.
Gold actually
proved relatively strong early on, rallying 0.3% month-to-date by
June’s 10th trading day which is gold’s major seasonal low. That
was all the more remarkable considering it came the day after
a major Fed decision. The Federal Open Market Committee not only
hiked its federal-funds rate for the 7th time
in this cycle,
but upped its forecast for future rate hikes. Such hawkishness has
hammered gold in the past.
Gold-futures
speculators dominate gold’s near-term price action, especially when
investors are missing in action like during market summers. Gold
futures allow insane extreme leverage. Back on June 14th when gold
hit $1302, a single gold-futures contract controlling 100 troy
ounces was worth $130,200. Yet traders were only required to
maintain cash margin balances of $3100 per contract, which is next
to nothing.
Thus gold-futures
speculators were able to run maximum leverage up to 42.0x! Even
this week following gold’s sharp selloff since, 40.4x is still
possible. That gives fully-margined gold-futures speculators 40x
the price impact on gold as an investor buying outright! So $1
of margin supporting gold-futures selling hits gold as hard as $40
of investment selling. That gives futures traders outsized
influence over gold’s price.
Running such
extreme leverage is hyper-risky, as a mere 2.5% gold-price move
against traders’ positions would wipe out 100% of their capital
risked. Thus these gold-futures speculators are naturally forced to
have an ultra-short-term focus. Fundamentals are meaningless
to them, all they care about is what gold is likely to do over the
coming hours and days. They can’t afford to be wrong for long at
extreme 40x leverage!
So gold-futures
speculators are obsessed with anything that can quickly move gold.
Topping that list are Fed actions, the US dollar’s fortunes, and
major US economic reports like today’s monthly jobs number. Often
all three of these are interrelated. The dollar is more likely to
be bid higher on a hawkish Fed, and the Fed is more likely to hike
rates if economic data is strong. So these things can really bully
gold around.
At every other
FOMC meeting, top Fed officials’ individual federal-funds-rate
outlooks are summarized on a table traders call the dot plot.
Released quarterly, this can really unleash gold-futures trading
moving gold fast. If the dot plot is more hawkish than expected,
indicating more near-term rate hikes likely, gold often gets sold
hard. The Fed’s 2nd rate hike of this cycle in mid-December 2016
set recent years’ precedent.
That day the
FOMC’s latest dot plot went from implying 2 more rate hikes in 2017
to 3. Despite
history proving the opposite, gold-futures speculators believe
higher interest rates are bearish for gold. So they aggressively
dumped gold futures, hammering gold 1.4% lower that day and 1.2% the
next. And after other FOMC meetings accompanied by
more-dovish-than-expected dot plots, gold has been strongly bid
higher.
So when that
newest dot plot last month came in hawkish, there were high odds
gold would suffer a sharp selloff. Especially in the dark heart of
the summer doldrums, when investors aren’t around to moderate or
overpower speculators’ gold-futures trading. On June’s latest Fed
Day, top FOMC officials’ collective rate-hike outlook climbed from 3
total hikes in 2018 to 4. That should’ve unleashed serious
gold-futures selling.
But amazingly it
didn’t, gold rallied 0.3% on the 13th despite this latest hawkish
dot plot. And even more remarkable was its 0.2% gain the next day
to $1302. That morning the European Central Bank made a major
policy announcement. It declared it was ending its enormous
quantitative-easing campaign at the end of 2018, but tried to
mollify currency traders by promising it wouldn’t hike rates
before next summer.
So despite the
hawkish end of ECB QE, the euro plummeted 1.8% on the dovish
surprise of a promise to hold off on rate hikes. Since the euro
accounts for almost 58% of its weight, the US Dollar Index blasted
1.3% higher on that. That made for the best up day by far of the
dollar’s entire recent
short-squeeze
rally that has really weighed on gold since mid-April. Gold
could’ve easily fallen 1% to 2% on that dollar surge.
But surprisingly
gold-futures speculators didn’t sell on the 14th, oddly ignoring
that blistering dollar surge. With gold holding rock-solid through
two major selling catalysts erupting right in the middle of the
summer doldrums, they looked to be waning. Gold’s resilience was
very impressive. But unfortunately all of that collapsed the very
next morning. The gold-futures speculators resumed heavy selling
with a vengeance.
Early on the 15th,
the US published its target list of Chinese imports worth $50b
annually to be subjected to new 25% tariffs effective today July
6th. For some reason that triggered huge gold-futures selling.
These traders have ignored most other escalating-trade-war threats
in recent months, but that day they didn’t. Over the 4 hours
following that announcement, a staggering 260k gold-futures
contracts changed hands!
So gold plunged
from $1299 right before that tariff warning to a serious 1.7% loss
that day to $1279. A lot of traders believe the US dollar will be
bid higher in trade wars. They could ignite stock-market selloffs
leading to safe-haven dollar buying. And other countries could
increasingly devalue their own currencies to partially offset the
adverse price impact of US tariffs on their exports. That could
lead to a stronger dollar.
But the dollar
sure wasn’t rallying that day, with the USDX finishing dead flat.
Yet gold selling started that day that persisted right into this
week. As of this Monday, gold had fallen in 10 of the 12 trading
days starting with that odd gold-futures selling blitz on trade-war
fears. That dragged gold 4.6% lower in that short span, nearing the
bottom of its usual +/-5% summer-doldrums trading range. That is
super-weak action.
Gold plunged 3.5%
last month, vastly worse than that modern-bull-market-year average
loss of 0.2% in June. After ignoring another Fed rate hike, a
hawkish-dot-plot surprise, and then a surging US dollar thanks to a
“dovish” ECB, gold-futures speculators finally capitulated over the
last several weeks or so. Odds are that largely exhausted
their selling, paving the way for gold’s major autumn rally to erupt
very soon.
Speculators’
collective gold-futures positions are reported late Friday
afternoons in the CFTC’s famous Commitments of Traders reports.
These CoT reads are current to the preceding Tuesday closes, so the
latest data available when this essay was published was June
26th’s. At that point just under 3/4ths of gold’s total selloff
over the past several weeks or so had happened, thus most of the
recent picture is evident.
This next chart
looks at gold-futures speculators’ total long and short contracts
per those weekly CoTs rendered in greed and red respectively. Gold
is superimposed over the top of that in blue. When these traders
are buying gold futures, both by adding new longs and covering
shorts, gold rallies. When they are selling gold futures, both by
dumping longs and adding new shorts, gold falls. That’s what just
happened.
A day before that
latest FOMC decision and hawkish dot plot in mid-June, speculators
held 240.9k gold-futures long contracts and 100.3k short ones.
Those were both pretty low, which meant gold’s outlook was mixed
heading into Fed Day. Speculators had lots of room to add new
longs, which was bullish for gold. But they also had big capital
firepower available to ramp their short selling, which was certainly
bearish.
One way to
visualize the near-term gold-price implications of specs’ collective
gold-futures positioning is to consider their total longs and shorts
relative to their past-year trading ranges. On Fed eve in
mid-June, total spec longs were running just 3% up into their
past-year trading range. Speculators had already sold them down
aggressively during the recent USDX-short-squeeze rally, leaving
them with relatively little left to sell.
The CoT week
before, total spec longs had actually fallen to a deep 2.3-year
low. Speculators had not been less bullish or more bearish on gold
since early February 2016, before today’s bull became official!
They were effectively all-out on the long side, so heavy long
selling was very unlikely regardless of what the Fed or ECB did.
All the downside risk was on the short side, as I had warned
our subscribers in early June.
Total spec shorts
were running just 17% up into their own past-year trading range on
Fed eve in mid-June. That meant these traders likely still had room
to do 5/6ths of their probable near-term short selling if the right
catalyst arose. A hawkish dot plot would probably be it, although
that heavy shorting didn’t erupt until a couple trading days later
on trade-war news. And that short selling soared to
near-record extremes!
In the next CoT
week that straddled the Fed, ECB, and that US announcement of
imminent major tariffs on Chinese goods, total spec longs actually
climbed a sizable 9.1k contracts. But that impressive buying in the
summer doldrums was far overpowered by a stupendous 35.5k
contracts of new gold-futures short selling by the speculators!
Together that added up to the equivalent of 82.3 metric tons of gold
dumped.
That’s far too
much for normal demand to absorb in any single CoT week, let alone
in the dark heart of the summer doldrums when investors are on the
sidelines. According to the latest fundamental data from the World
Gold Council, global investment demand averaged 22.1t per week in
Q1’18. So nearly 4x that being flung into the markets by
gold-futures speculators was far too much to digest, thus gold
plunged.
The astounding
part of all this is that 35.5k contracts of gold-futures shorting
made for the 2nd-highest on record out of all 1016 CoT weeks
since early 1999 by that point! That was only exceeded by another
epic shorting blitz in mid-November 2015 leading into the Fed’s
first rate hike of this cycle. Extreme gold-futures short selling
is wildly unsustainable, which makes it a very-bullish indicator for
gold following such episodes.
Unlike long-side
buying which speculators are never compelled to do, short covering
is mandatory. In order to sell short gold futures, traders
effectively have to borrow them first. Those debts legally must be
repaid in the near future. The way that is done mechanically is
through buying long contracts to offset and close out those shorts.
So gold-futures short selling is guaranteed symmetrical
near-future buying!
The upside price
impact on gold of buying long contracts to cover shorts and normal
long-side buying is identical. So gold rallies sharply on
short-covering long buying after heavy shorting. The more extreme
speculators’ gold-futures shorting, the bigger the subsequent buying
to cover and close those positions. And in the next CoT week after
that near-record one, specs shorted another 14.7k gold-futures
contracts.
So as of June
26th, in just two CoT weeks gold-futures speculators had short sold
a gargantuan 50.3k contracts! That’s the equivalent of
156.3t of gold, a huge amount. That left total spec shorts way up
at an 11.0-month high of 150.6k contracts. They hadn’t been higher
since last summer early in gold’s major autumn rally. In
past-year-trading-range terms, total spec longs and shorts were
running 6% and 64% up in.
The lower spec
longs and higher spec shorts, the more bullish gold’s near-term
outlook. When longs are low all these traders can do is buy since
their selling is exhausted. And the same is true when shorts are
high, the available capital firepower for selling short has been
expended so the only action traders can take is covering shorts.
Thus the most-bullish situation possible for gold is 0% longs and
100% shorts.
Given gold’s
continuing weak price action in this latest CoT week ending this
Tuesday July 3rd, I suspect there’s been some long selling and even
more shorting. Thus we are probably getting as close to 0% longs
and 100% shorts as we’ve been since last year’s summer doldrums.
And as the gold trading action coming out of them proved, that’s
really bullish for gold’s outlook over the coming weeks and
months.
A year ago in
early July, total spec longs and shorts hit 10% and 100% up into
their past-year trading ranges. Over the next couple CoT weeks they
stabilized at 7% and 100% then 6% and 99%. These elite traders had
exhausted nearly all their likely selling, leaving them nothing to
do but buy. I wrote an essay last July highlighting the
extreme levels
of gold-futures shorting. Last summer looked much like this one.
The Fed hiked
rates for the 4th time in this cycle in mid-June 2017. Over the
next several weeks, gold dropped 4.2% to $1212 on Jobs Friday July
7th. That ought to sound familiar, as gold was down 4.1% between
the day before last month’s latest Fed rate hike and this Monday.
And once again the monthly US jobs report just came out this
morning. Like this week, a year ago everyone was very bearish on
gold.
But with
speculators’ gold-futures selling so exhausted, that miserable
sentiment didn’t matter. These guys couldn’t sell much more, and
they were soon forced to start buying to cover their extreme
shorts. That fed on itself, pushing gold high enough to entice in
new long-side buying. Thus between early July and early September
2017, gold surged 11.2% higher in a
nice autumn
rally. Another one is imminent.
If gold bottomed
earlier this week at $1242, a similar gain this year would catapult
it to $1381 by late September or so. That would drive a
major bull-market
breakout above both $1350 resistance and the $1365 bull-to-date
peak from way back in July 2016! Seeing new bull-market highs would
get investors excited about gold again. They would start
flooding back in in a big way fueling the next major bull-market
upleg.
Just like early
last July, with speculators’ gold-futures selling largely
exhausted these traders will soon have to start buying to
cover. That’s the first stage of
major gold uplegs,
as that early buying drives gold high enough to first bring back
long-side gold-futures speculators and later investors. Gold is
well set up for a major autumn rally in the coming weeks and months,
with spec longs and shorts nearing 0% and 100%.
Far from being
something to fret about, the summer doldrums are a gift for prudent
contrarian investors and speculators. They offer the best seasonal
buying opportunities of the year in gold, silver, and their miners’
stocks. Late last summer as gold powered 11.2% higher, the
benchmark HUI gold-stock index leveraged that to a strong 22.7% gain
in that exact span. Today’s
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The bottom line is
the recent gold selling is exhausting. While gold tends to be weak
in early summers as investors zone out, this year’s downside has
been worse than usual. While their longs were already low entering
summer, the gold-futures speculators just unleashed a near-record
shorting blitz on trade-war fears. But that’s wildly unsustainable,
guaranteeing symmetrical near-future buying as those shorts are
covered.
Low spec longs and
high spec shorts leave gold perfectly positioned for another major
autumn rally this year. That could ignite any day, and ought to
push gold high enough to achieve the long-awaited bull-market
breakout to major new highs. Now is the time to buy gold, silver,
and especially their miners’ stocks at today’s dirt-cheap prices
around these seasonal lows. Big gains later require buying low out
of favor. | 
