Gold’s recent pullback sure overstayed its welcome, increasingly
vexing as August marched on. That festering weakness really did a
number on sentiment, leaving mounting bearishness in its wake.
Flaring gold-futures short selling was the dominant reason gold
faltered so last month. But such shorting spikes have proven very
bullish for gold historically, guaranteed to soon reverse into big
proportional buying.
With
all the apathy and fear reigning in gold-land lately, you’d think
gold prices must have collapsed. That certainly isn’t true. Gold
did suffer a 7.9% pullback over 3.5 months from early May to
mid-August, fueling widespread pessimism. But that followed a
powerful upleg that catapulted the yellow metal up 26.3% in
the preceding 7.2 months. Its $2,050 crest was within spitting
distance of a new nominal all-time-record high!
Pullbacks are natural and healthy in bull-market uplegs, serving to
rebalance sentiment to prolong their lives. Uplegs take two steps
forward before retreating one step back, with the latter necessary
to eradicate excessive herd greed near interim highs. This latest
gold upleg weathered an earlier 7.2% pullback in February, then
quickly surged 13.2% to major new highs! Pullbacks offer
mid-upleg buying opportunities.
Although normal-sized, gold’s latest pullback has lingered longer
than usual. It looked finished in late June, after gold had dropped
6.9% in 1.8 months to bottom near $1,908. I wrote an essay right
after analyzing
gold’s bullish technicals then. Indeed the yellow metal’s
strong upleg resumed, surging 3.6% into mid-July to regain $1,977.
Gold achieved some confirming technical breakouts and
consolidated high.
Exiting July at $1,966, gold was well positioned to surge again in
August. Last month is normally when
gold’s
traditional autumn rally seriously gathers steam. During modern
gold-bull years, August has enjoyed the third-best calendar-month
gains up 1.7% on average! But that sure didn’t happen this time
around, August greatly deviated from its seasonal script. Gold was
pounded lower by unusual selling pressure.
At
worst the yellow metal dropped a steep 3.9% month-to-date in
mid-August! That included a super-rare ten-trading-day losing
streak where gold broke down below late June’s original pullback
low. At worst last month gold closed at $1,889, extending that
pullback to 7.9%. That technical relapse certainly wrought a lot of
sentimental damage, despite gold only slumping to a marginal new
low. Why did all this happen?
Like
usual when gold behaves oddly, the gold-futures speculators are to
blame. These guys run extreme leverage that enables them to punch
way above their weights in bullying around gold prices. Each
gold-futures contract controlling 100 ounces of gold worth $194,000
at $1,940 only requires traders to maintain $8,300 cash margins in
their accounts. That enables incredible maximum leverage running up
to 23.4x!
Way
up near 23x, each dollar traded in gold futures has fully 23x the
gold-price impact of a dollar invested outright. So
gold-futures specs wield greatly-outsized influence over short-term
gold prices. And that is amplified even further by the US
gold-futures price being gold’s world reference one. Investors
carefully watch that gold-futures-dominated price action, which can
heavily sway their collective psychology on the metal.
Back
in mid-July when gold’s resuming upleg regained $1,977, spec
gold-futures positioning remained very bullish. Since longs way
outnumber shorts, they are proportionally more important for gold’s
near-term direction. Then total spec longs were just 3/8ths up
into their probable gold-upleg trading range! Its lower end was
defined in late September 2022 when gold bottomed at
stock-panic-level 2.5-year secular lows.
Its
upper resistance has run around 413k longs in recent years, where
spec buying exhausted itself and slayed gold uplegs. This is
readily evident in this chart, which superimposes gold prices over
total spec longs and shorts since 2021. Speculators’ gold-futures
positioning is only published once a week in the famous Commitments
of Traders reports. That data is released late Fridays, current to
preceding Tuesdays.
With
total spec longs remaining on the low side of their range in
mid-July, probabilities really favored gold continuing to
rally on balance. Total spec shorts were down at lower support,
which isn’t unusual later in powerful gold uplegs. Honestly renewed
gold-futures short selling wasn’t even on the radar then. Over the
last 52 weeks, total spec longs ran 2.4x total spec shorts making
them proportionally more important.
At
extreme 23.4x leverage, gold-futures speculators can’t afford to be
wrong for long. A mere 4.3% gold move against their bets would wipe
out 100% of their capital risked! That necessarily compresses their
trading time horizons into the ultra-short-term, mere hours or days
on the outside. They watch the US dollar’s fortunes for
their primary trading cues, which in turn are overwhelmingly driven
by Fed rate expectations.
Those mostly change in response to major economic data coming in
better or worse than economists are expecting, as well as jawboning
by top Fed officials. In early July as gold resumed powering
higher, key data like monthly US jobs and headline inflation were
generally missing which was viewed as Fed-dovish. That slammed
the US Dollar Index sharply lower, spawning big gold-futures buying
driving gold higher.
But
the USDX was getting oversold, so it started bouncing technically in
mid-July. That shook loose some gold-futures selling, yet the
yellow metal still consolidated high. But in late July the
Fed-rate-expectations tenor shifted decidedly hawkish,
starting with US GDP growth crushing forecasts. That accelerated
the US-dollar momentum buying, unleashing more gold-futures
selling. That’s readily evident in this chart.
There have been five reported CoT weeks since gold hit $1,977 in
mid-July. The initial futures selling on that USDX bounce came in
on the long side, weighing in at a larger 14.0k and 13.3k contracts
during the first two CoT weeks into late July. That left spec
long-side positioning even more bullish for gold, dragged back down
to only 1/5th up into its probable gold-upleg trading range.
Gold held strong through that near $1,965.
That
spec-long selling started waning into early August, retreating to a
sizable 8.4k contracts. After decades of analyzing this CoT data
every week, I consider under 5k small, 10k sizable, 15k large, and
20k+ huge. But then with gold weakening, gold-futures short
selling suddenly flared as speculators jumped on gold’s downside
momentum. That third CoT week of this span saw shorting surge up to
10.9k contracts.
That
was the most by far since early March, pounding gold back down near
$1,925. While that ramped bearishness, technically it wasn’t a big
deal with gold remaining well above late June’s $1,908 pullback
low. But the yellow metal continued grinding lower on balance as
the USDX kept rallying, slumping down to $1,903 in the fourth CoT
week since mid-July. While minor, that breakdown really fanned the
flames of worry.
Since that weekly CoT data is delayed a few days, we never have it
in real-time. So it was quite shocking to see what transpired in
gold-futures-land to push gold marginally under late-June levels.
Speculators actually resumed their long buying, adding a small 3.6k
contracts. That implied they had run out of near-term capital
firepower available for selling, a bullish omen for gold. Yet oddly
short selling utterly skyrocketed.
In
that fourth CoT week ending August 15th, specs added a jaw-droppingly-extreme
29.2k new shorts! Shorting at that magnitude is exceedingly
rare. Out of all 1,285 CoT weeks since early 1999, that ranked as
the ninth highest on record for spec shorting! These
hyper-leveraged traders apparently expected to see gold’s
multi-month pullback really accelerate. Yet gold prices proved
remarkably resilient through this.
For
nearly a quarter-century now, I’ve written weekly and monthly
financial newsletters focused on trading gold stocks. Since specs’
gold-futures trading often dominates gold’s short-term price action,
I analyze every new CoT in our newsletters. During past CoT weeks
seeing extreme shorting, gold often fell hard. 29k+ contracts of
shorting should’ve pummeled it 3%+ lower. Yet gold merely
slipped 1.2% through that onslaught!
During this latest fifth reported CoT week since late July, gold
slipped marginally lower to $1,889. That extended its losing streak
to that extraordinary ten trading days in a row. But for all
intents and purposes, gold was consolidating low. Its total
pullback since early May merely extended to 7.9%. And it was down
4.5% over a month or so where the US Dollar Index soared a massive
3.5% higher! Gold was holding its own.
Gold
finally started edging higher late in that CoT week. Still those
bearish gold-futures speculators tried to press their advantage,
adding another big 15.1k short contracts! That ballooned their
total shorts to an extreme and unsustainable 150.6k contracts!
Such levels never last long historically, soon giving way to
proportional mean-reversion buying. Specs also dumped a small 5.8k
longs in that gold-bottoming CoT week.
Gold
definitely wouldn’t have broken down to new pullback lows had spec
gold-futures short selling not flared in early August. Those
leveraged traders pressing gold’s downside momentum sucked in
investors as well. While global gold investment-demand numbers are
only published quarterly by the World Gold Council, a great
high-resolution daily proxy for them is
the combined
holdings of the GLD and IAU gold ETFs.
Exiting Q2, these mighty American behemoths commanded 40.0% of
all the gold bullion held by all the world’s physically-backed
gold ETFs! A UK gold ETF was a distant third at just 7.0%. When
GLD+IAU holdings are declining, it reveals American stock-market
investors pulling capital back out of gold. They are selling
gold-ETF shares faster than gold itself is selling off, exacerbating
the yellow metal’s decline.
From
mid-July to mid-August when gold fell 4.5%, GLD+IAU holdings dropped
a sizable 2.1%. By late August they had swooned to 1,317.1 metric
tons which was a deep 3.4-year secular low! American stock
investors hadn’t owned less gold since March 2020 just emerging from
the pandemic-lockdown stock panic. Gold is seriously out of favor,
partially thanks to that huge spec gold-futures shorting driving it
lower.
While spec shorts can occasionally shoot higher, that mostly happens
after large selloffs approaching or exceeding the 20%
new-bear-market threshold. Gold remains far from such carnage, with
its powerful upleg since last September very much intact. Massive
gold-futures shorting is actually very bullish for gold,
guaranteeing imminent big mean-reversion rebounds. This latest
one looks to be getting underway.
While spec gold-futures long buying is much larger and more
important than short selling, the former is totally voluntary.
Traders have no obligation to pile in and chase gold upside by
adding longs. But once they sell gold futures short, they legally
have to soon close out those bets by buying offsetting longs.
So every contract shorted has to be reversed by proportional buying,
which quickly catapults gold prices higher.
This
spec-gold-futures-positioning chart covering the past few years or
so reveals about a half-dozen prior short-selling spikes. All were
preceded by sharp gold selloffs on that very shorting, much like
this recent one. But all were also immediately followed by
symmetrical sharp mean-reversion rebound rallies as specs had
to buy to cover and close those short contracts. This time won’t
prove any different, gold will surge higher.
Major gold uplegs have three distinct stages of buying. The first
one is gold-futures short covering, which initially launches gold
higher. At major secular gold lows, specs closing out shorts at big
profits are often the only meaningful buyers. Even at minor
pullback gold lows like this recent one, short covering gets the
ball rolling. That propels gold high enough for long enough to
start enticing back bigger long-side buying.
Stage-one short covering is the trigger igniting that more-important
stage-two long buying! And with total spec longs still way down at
271.7k contracts in this latest-reported CoT week, these traders
still have big room to do nearly 6/7ths of their likely
gold-upleg buying! That stage-two buying eventually pushes gold
even higher for even longer ultimately convincing investors to start
returning with their vast stage-three buying.
These sequentially-triggered telescoping gold-buying phases are what
fuel big gold uplegs. Already up 26.3% at best so far in early May,
today’s is definitely a big one. But with spec gold-futures longs
still so low, it has good odds of growing into a monster. Back in
2020, a pair of mighty gold uplegs peaked at huge 42.7% and 40.0%
gains! Today’s could again best 40% with investment demand
coming back online.
That
portends $2,275 gold in coming months, shattering its nominal
all-time-record high of $2,062 from August 2020! Once gold forges
into record territory, herd sentiment will shift fast. Bullishness
will surge as the financial media increasingly covers gold’s
advance, fueling growing greed and fear-of-missing-out
momentum-chasing buying. This recent extreme gold-futures shorting
being unwound could spark that run.
The
battered gold stocks have the most to gain as gold’s powerful upleg
resumes with a vengeance. As gold fell 4.5% between mid-July to
mid-August, the leading GDX gold-stock ETF plunged 15.9%. That
amplified gold’s downside by a big 3.6x, well beyond the usual 2x to
3x from the major gold miners. It also extended GDX’s total selloff
since its own mid-April upleg peak to an also-disproportional 23.4%.
So
as gold mean reverts sharply higher initially on gold-futures short
covering, the gold stocks should really leverage its gains. GDX’s
upleg was up 63.9% at best this spring, but averaged monster 105.4%
gains when gold last achieved 40%+ ones in 2020! And the smaller
better gold miners now filling our newsletter trading books should
way outperform the GDX majors. The opportunities in this sector are
awesome.
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The
bottom line is gold’s recent breakdown to new pullback lows was
driven by extreme gold-futures short selling. Speculators piled in
to chase gold’s downside momentum as the US dollar bounced sharply
on Fed-hawkish economic data. Yet despite some of the largest
shorting on record and resulting investment selling, gold proved
resilient. Rather than plunging, it merely slumped to marginal new
still-pullback-grade lows.
Past
shorting spikes have proven very bullish for gold, as those bearish
bets must soon be reversed with proportional gold-futures buying.
That short covering ignites major gold surges, pushing the metal
high enough for long enough to entice back larger gold-futures long
buying and ultimately investment buying. As usual the battered gold
stocks will prove the biggest beneficiaries of gold’s powerful upleg
resuming. |