Gold
has suffered a sharp pullback over the past couple weeks, stoking
much bearish sentiment. While a variety of factors fed this
selloff, the precipitating catalyst was a gold-futures shorting
attack. These are relatively-rare episodes of extreme selling
specifically timed and executed to manipulate gold prices lower
rapidly. Traders need to understand these events, which are
inherently self-limiting and soon bullish.
Gold-futures shorting attacks are very real, with telltale volume
and price signatures unlike anything else. I’ve studied them for
many years now, and have written extensively about them in our
newsletters as they occur. But it’s critical to realize these rare
events are only responsible for a tiny fraction of all gold
selling. The vast majority of the time gold selloffs are driven by
other far-more-normal factors, not shorting attacks.
These isolated anomalous episodes are often cited as proof the gold
price is actively manipulated. But whether that’s true or not,
gold-futures shorting attacks can only explain tiny sporadic swaths
of gold-price behavior. When they occur their impacts can
definitely be outsized, but these are always short-lived.
That’s because the huge selling necessary to execute a shorting
attack is far too extreme to be sustained.
Gold-futures shorting attacks are naturally a subset of gold-futures
trading, which dominates short-term gold prices. Gold-futures
speculators enjoy a wildly-disproportional impact on gold levels for
a couple of key reasons. The American-gold-futures-derived gold
price is the world’s reference price. So whatever the
futures speculators as a herd are doing greatly affects popular
psychology among gold traders globally.
Speculators’ gold-futures trading is a sentiment multiplier.
When these guys are buying and driving up gold, other traders grow
bullish and start committing their own capital. This virtuous
circle feeds on itself. But when speculators are selling gold
futures and pushing gold lower, the rest of the traders get nervous
and bearish. So they tend to join in the selling, exacerbating the
downside. Traders key off gold-futures action.
On
top of this, gold futures inherently enjoy extreme leverage to gold
which greatly amplifies their impact on its price. Each
gold-futures contract controls 100 troy ounces of gold. At $1250,
that’s worth $125,000 in notional terms. But the margin required to
trade a gold-futures contract is merely $4200. So a speculator
running minimum margin can employ extreme leverage nearing 30x!
The legal limit in the stock markets is 2x.
Compared to normal gold investors buying outright at 1x
leverage, every dollar of capital bet by futures speculators can
have 20x to 30x the gold-price impact! So even though gold
investment dwarfs gold-futures trading, on a short-term basis the
latter is like the tail that wags the gold-price dog. This extreme
leverage inherent in gold futures is the only reason shorting
attacks using them are even possible in the first place.
The
mechanics of a gold-futures shorting attack are simple. A large
speculator or group of them short sells gold-futures contracts at
dizzying rates only sustainable for minutes on the outside.
That’s far too much selling pressure for gold futures to absorb,
radically beyond normal trading tempos. The resulting extreme
sell-side imbalance forces gold prices to plunge before enough
buyers emerge to absorb that selling.
The
speculators executing these attacks hope they spawn widespread
gold-futures selling. Because of gold futures’ extreme
leverage, traders can’t afford to be wrong for long. At 25x, a mere
4% gold-price move against a position results in a 100% loss of
capital risked! So the short sellers hope their selling blitzes
will force opposing long-side speculators to capitulate and sell,
usually via mechanical stop-loss orders.
This
additional selling of gold-futures long contracts drives its price
even lower, tripping more stop losses already in place. Then with
gold sharply lower, the speculators who launched the shorting attack
start to gradually buy gold futures to cover and close their
positions. Buying back at lower gold prices than they sold at leads
to profits. This whole process is very fast, measured in
minutes for shorting and hours for covering.
Gold-futures shorting attacks are easy to identify because the
trading volumes are so extreme. Every week, the Commodity Futures
Trading Commission details speculators’ total long and short
gold-futures positions in its famous Commitments of Traders
reports. A big swing in total spec longs or shorts in any entire
week is 20k+ gold-futures contracts. Gold-futures shorting
attacks dump 20k+ contracts in minutes!
This
chart looks at speculators’ total gold-futures long and short
contracts since 2015, in green and red respectively. Gold itself is
superimposed in blue. It’s incredible how much speculators’
collective gold-futures trading dominates short-term gold
price action. I’ve written a bunch of essays on this, the
most-recent in
late February. Gold price action cannot be understood and gamed
without following gold futures.
Just
a few weeks ago as gold challenged $1290, a series of gold-futures
shorting attacks were unleashed in rapid succession. They quickly
turned gold south, nullifying its
recent bullish
breakout above its 200-day moving average. In order to better
grasp what just happened to gold, and why it is actually quite
bullish, a major past gold-futures shorting attack offers
illumination. The most successful came in July 2015.
During that lazy summer a couple years ago, gold was relatively low
but stable. It had spent months meandering between roughly $1175
and $1200, with range outliers near $1150 and $1225. Then on Friday
July 17th, some gold news hit. Continuously since April 2009, the
Chinese government had claimed it hadn’t bought any gold to add to
its central bank’s reserves. Few in the gold world believed that
was true.
That
day out of the blue, the People’s Bank of China declared its gold
reserves were 1658 metric tons. It was a 57% jump from the
previously-reported number, and likely still fake and
wildly-understated. But it was far behind analysts’ estimates that
the PBoC really held 3500t+ of gold. So gold slumped 1.0% that day
to $1134, below the lower end of its summer trading range.
Naturally sentiment was pretty bearish.
With
gold on the verge of a technical breakdown, some large speculator
decided to launch a gold-futures shorting attack to hasten the
process. The execution of this was particularly Machiavellian,
coming late on a Sunday night when gold-futures trading
volume was exceptionally low. While the great majority of
gold-futures trading occurs during American market hours, electronic
trading is actually open 23 hours a day.
So
the US Monday trading day effectively really starts on Sunday
evening at 6pm NYT. That happens to be well before the Asian
markets even open, so anomalous gold trading action then can only
come from the extended US session. That Sunday night July 19th when
no one was paying attention, some large trader slammed through 24k
contracts of gold-futures sell orders within just over a single
minute! It was crazy.
That
volume spike was so extreme that twice within that single
minute separate 20-second trading halts were triggered! So the
effective dump time of this massive slug of contracts was actually
seconds. The gold price plummeted $48 lower to $1086 in that one
minute! That was a dismal new 5.3-year secular low for gold, so it
was devastating for sentiment. I wrote
much more detail
on this event soon after it happened.
Inarguably the only reason to sell 20k+ gold-futures contracts
within minutes is to brazenly attempt to manipulate gold’s price
lower. Long-side speculators who want to exit positions never
sell so fast, since it blasts gold lower wrecking their exit
prices. And the same is true for normal short-side speculators. If
they expect gold to drop and want to establish shorts, they execute
their selling gradually for the best entries.
Long-side and short-side speculators alike want to sell gold futures
at the highest gold price possible. So they don’t sabotage
their own exits and entries by unleashing far more selling than the
market can bear. Normal rational speculators enter and exit large
positions relative to market volume gradually, over hours. A
20k-contract buy or sell order broken into pieces and spread across
hours will have a far-smaller price impact.
That
Sunday-night extreme selling blitz in July 2015 was specifically
timed and executed to manipulate the gold price sharply lower. And
it succeeded with flying colors! But it wasn’t bearish for gold for
long. That $1086 gold low hit the second that extreme short selling
ended was about as low as gold got. The silver lining of
gold-futures shorting is all those contracts must soon be
repurchased to close those positions.
Short selling is effectively borrowing gold futures a speculator
doesn’t own to sell them, in the hopes of buying them back later at
lower gold prices to repay those debts. So every single contract
sold short has to be closed by buying an offsetting long contract.
20k contracts of gold-futures short selling guarantees 20k contracts
of long buying is coming in the near future. Thus gold-futures
shorting attacks are self-limiting.
Since that short covering after an attack comes gradually, it isn’t
evident in trading volume like the initial extreme shorting.
There’s no way to know when the offending speculators covered. But
gold only drifted modestly lower over the next several weeks or so.
The Monday after that Sunday-night shorting attack, gold closed near
$1098. At worst in early August, gold fell to $1084 on close. And
then it started to rally.
Gold-futures shorting attacks are designed to manipulate herd
psychology to unleash cascading selling. But that primarily
only works on other hyper-leveraged futures speculators. Gold’s
investors don’t use leverage, so a few-percent price drop for them
is a proportional minor loss. Thus shorting attacks usually don’t
spook them into selling. It’s only gold-futures speculators that
are forced out, and that process is fast.
After that July 2015 shorting attack, gold bottomed just 4.4% lower
than pre-attack levels less than three weeks later. By that point
selling was exhausted, all traders susceptible to being
scared into selling low had already sold. That left only buyers, so
gold gradually powered 9.6% higher to $1188 over the next 10 weeks
or so! Gold-futures shorting attacks effectively suck in all
near-term selling, clearing it out of the way.
That
July 2015 Sunday-night event was the most-successful example of a
gold-futures shorting attack in recent years. While it wreaked real
damage on gold technicals and sentiment, that was short-lived. The
24k contracts dumped in a minute had to be covered with offsetting
long buying, and the resulting bearish sentiment soon led to selling
exhaustion. So gold rallied strongly out of that
manipulative shorting episode.
With
this background, fast forward to April 2017 a couple weeks ago. By
mid-month, gold was doing really well. It had surged 7.4% higher in
just over 4 weeks since the Fed’s third rate hike of this new cycle
which had been
irrationally expected to be super-bearish for gold. Then some
large speculator or group of them started probing gold’s downside on
Tuesday April 18th with the initial gold-futures shorting attack.
It
happened just before 10am NYT that day, which is when the new
iteration of the anachronistic London Gold Fix afternoon price
auction happens. It’s now called the LBMA Gold price auction, and
it shouldn’t even exist in this modern world of continuous price
discovery. The precise timing of the London Gold Fix makes it very
susceptible to manipulation, as many academic studies and even
lawsuits have extensively proven.
Large traders with business contracts tied to that gold fix can
attempt to bully the gold price around just before its auction. And
they do, with an overwhelming downside bias. That day just
before the new LBMA Gold price auction someone dumped 22k+
gold-futures contracts within minutes. But gold hardly bent under
that heavy pressure, merely sliding from $1286 to $1279. It then
surged to close up 0.4% at $1289!
That
initial gold-futures shorting attack certainly stood out. It had
the telltale volume and price signature of such an event, but failed
miserably. That was very bullish that the gold-futures market could
absorb so much selling so fast without plunging. It looked like an
isolated attack until the very next day, when again just before the
current version of the London Gold Fix an even more extreme shorting
attack was executed.
On
Wednesday April 19th just before 10am NYT again, someone slammed
through a 25k-contract gold-futures sell order in a single
minute! The intensity of gold-futures shorting attacks is
defined by both the total contracts sold and the compressed time
span they’re dumped in. That attack was actually slightly bigger
and shorter than that July 2015 one, and thus more intense. But its
impact was really muted.
Gold
plunged from $1286 to $1275 within minutes, and then rallied back to
a -0.7% close at $1280. If it had happened on a Sunday night, its
downside gold-price impact would’ve been far greater. Any
gold-futures shorting attack is pretty rare, so two in back-to-back
trading days was highly suspicious. A large speculator was
actively trying to manipulate the gold price lower in a big and
brazen way, out in the open.
That
was leading into April’s third Friday, which is options expiration.
And that was after gold had surged sharply in the month following
the Fed’s latest rate hike in mid-March, which was universally
assumed to be very bearish for gold. So I wondered if some large
trader, like a hedge fund, was facing big losses on gold futures or
options. Maybe that trader feared gold cresting $1300 would unleash
universal new buying.
Whatever the motivation for those attacks, gold proved remarkably
resilient through them. That Thursday and Friday saw no more
abnormal selling leading into the 10am NYT LBMA Gold price
auctions. So it looked like we were out of the woods. France had
the first round of its presidential election that Sunday the 23rd,
which played out exactly as expected by pollsters and
traders. The winners didn’t surprise markets.
The
worst-case scenario which didn’t happen was the popular far-right
candidate along with an openly-Communist far-left one winning the
two top spots for this weekend’s second-round runoff. They both
openly oppose the euro and European Union. But the first-round
winner who is expected to dominate the final-round vote this weekend
is a moderate, very pro-Europe. So there was no adverse France
surprise!
Yet
that very Sunday evening at 6pm NYT as the electronic American
gold-futures session opened, a massive sell order slammed the
markets. This was well before Asian markets even opened, so it was
definitely US gold-futures trading. With volume so low on Sunday
evening, gold plunged from the $1284 it had closed near the Friday
before to $1265. That third gold-futures shorting attack was
finally successful.
It
was the same modus operandi as that July 2015 masterpiece, a
Sunday-evening blitz to unleash stop-loss selling among other
long-side speculators. And though gold only fell $19 in minutes
compared to $48 in July 2015, enough sentiment damage was done.
That sparked the gold selloff that has continued and accelerated
right into this week. Selling begets selling, and the catalyzing
event was that shorting attack.
Remember gold-futures shorting attacks are exceedingly extreme and
fast, 20k+ contracts dumped in a matter of minutes on the outside.
As gold bounced sharply back up to $1276 within hours after that
latest shorting attack, those dumped contracts were likely already
covered by then. Indeed that week’s CoT report showed a mere
2.5k-contract climb in speculators’ total gold-futures shorts. The
attack was over.
But
it did multiply bearish psychology, leading to much
additional follow-on selling by other long-side gold-futures
speculators. In the month or so leading into that Sunday-evening
shorting attack, total long contracts held by speculators had surged
23% or 62k contracts. So there was plenty of selling to do if all
those new upside bets were liquidated. And that is what’s been
happening since that sparking attack.
While depressing over the short term, this selling is actually quite
bullish. Gold-futures shorting attacks act like cloud-seeding
operations to suppress severe thunderstorms. The resulting selling
is like a little rain now instead of hail forming later. All
speculators susceptible to being scared into selling are soon forced
out, leading to selling exhaustion. That leaves only buyers,
resulting in big multi-month gold rallies.
After that shorting-attack-spawned pullback in recent weeks, gold is
poised for a big rebound. Sooner or later some news will arise
igniting a stock-market selloff. That will
unleash big
demand for gold, from both speculators and investors. Futures
speculators rebuilding low long positions will drive a strong rally
in gold, which will be mirrored by its leading GLD SPDR Gold Shares
gold ETF which
stock investors buy.
But
these strong coming gold gains will be dwarfed by those in the
stocks of its miners, which have been hammered disproportionately
hard in this latest gold pullback. The gold stocks have once again
been irrationally bashed down to
fundamentally-absurd levels relative to prevailing gold prices.
This portends big mean-reversion gains coming once gold turns
higher again, as usual soon after gold-futures shorting attacks.
At
Zeal we’ve long specialized in gold-stock research and trading, as
this small contrarian sector is highly lucrative. We’ve literally
spent tens of thousands of hours researching gold stocks and
markets, so we can better decide what to trade and when. As of the
end of Q1, this has resulted in 928 recommended newsletter stock
trades since 2001. Their average annualized realized gains are way
up at a stellar +22.0%!
Gold
stocks are wildly oversold today, poised for a major surge.
Our acclaimed contrarian
weekly and
monthly
newsletters are full of our latest picks. They draw on our vast
experience, knowledge, wisdom, and ongoing research to explain
what’s going on in the markets, why, and how to trade them with
specific stocks.
Subscribe today and learn to think, trade, and thrive like
contrarians for only around $10 per issue!
The
bottom line is gold’s sharp pullback in recent weeks was sparked by
a series of gold-futures shorting attacks. Some large speculator
intentionally dumped massive amounts of gold-futures contracts
within minutes, several different times. Such extreme selling so
fast was way too much for markets to absorb, so gold fell. This
shifted gold psychology to bearish, resulting in cascading follow-on
selling by long-side traders.
While such gold-futures shorting attacks quickly hammer gold, they
are inherently self-limiting. All those shorts must soon be covered
with symmetrical offsetting long buying. So following the initial
multi-week selloffs after past gold-futures shorting attacks, gold
enjoys strong multi-month rallies. All the selling after the
shorting attacks soon leads to gold-futures selling exhaustion,
paving the way for big mean-reversion buying. |