Gold’s Jobs-Friday Plunge

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.

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