Near-Record Gold Shorting

Gold has failed to gain traction over the past couple months, normally a seasonally-strong time.That has really weighed on sentiment, leaving traders increasingly bearish.Gold investment demand has flagged dramatically with lofty stock markets spewing great euphoria.That’s given gold-futures speculators the run of the market, where they have sold aggressively including extreme shorting.But that’s actually very bullish.

Gold price action is driven by the collective trading of both investors and speculators. The former control vast amounts of capital, which dominates gold prices when it is migrating in or out.But investors’ interest in gold withers when stock markets are super-high. When stocks seemingly do nothing but rally, there’s no perceived need to prudently diversify stock-heavy portfolios with counter-moving gold.It falls out of favor.

Extreme stock-market euphoria is gold’s primary problem now, acting like kryptonite for gold investment. This week the flagship US S&P 500 broad-market stock index clawed back to a new all-time record high. That extended its monster rebound rally since late December’s near-bear lows to 24.8%!The farther the stock markets advance, the more gold is forgotten.Investors have relentlessly pulled capital back out of gold.

The best proxy for gold investment demand is the physical gold-bullion holdings of the world’s dominant gold exchange-traded fund, the American GLD SPDR Gold Shares.In early October soon after the S&P 500 peaked but before it started plunging in its severe 19.8% correction, GLD’s holdings slumped to a deep 2.6-year low of 730.2 metric tons. I explained these stock-market and GLD dynamics in depth last week.

Then the very day the stock markets first dropped hard, investors remembered gold. Over the next 3.8 months into late January, GLD’s holdings surged 12.8% to 823.9t on heavy capital inflows from American stock investors.That helped push gold 8.9% higher in that span.But as euphoria came roaring back as the S&P 500 rebounded sharply from its deep selloff, gold’s relative luster again faded in investors’ eyes.

Between late January and this week, they’ve dumped GLD shares much faster than gold itself was being sold.That has forced GLD’s holdings 9.2% lower in the last 2.8 months to 747.9t, helping push gold’s price down 2.7%.  Over 4/5ths of gold’s stock-market-correction-driven investment surge has now been erased, leaving GLD’s holdings just 2.4% above their secular lows of early October before stocks plunged!

The gold-investment selling via GLD in recent months has been relentless, especially in February and now April.During February’s 19 trading days, 13 saw GLD draws averaging 0.4%.And as of the middle of this week, April’s 17 trading days so far have seen 12 GLD-draw days also averaging 0.4%.Gold has faced unyielding selling pressure from American stock investors as the S&P 500 levitated ever higher.

There’s an old proverb stating “when the cat’s away, the mice will play”. That concept perfectly applies to the gold market.When investors are away, the gold-futures speculators will play.Investors’ capital just dwarfs speculators’, so when gold investment demand is robust spec trading is drowned out and usually irrelevant. But when investors aren’t interested, the gold-price impact of gold-futures trading is magnified.

These traders already punch far above their weights, their capital being far more potent than investors’ on a dollar-for-dollar basis.Gold futures allow extreme leverage far beyond anything legal in the stock markets.Each gold-futures contract controls 100 troy ounces of gold, which is worth $127,500 at $1275.But gold-futures speculators are only required to keep $3,400 cash in their accounts for each gold-futures contract.

That gives them absurd maximum leverage up to 37.5x, compared to the decades-old 2.0x limit in stock markets! At 30x leverage, every dollar deployed in gold futures has literally 30x the price impact on gold as another dollar used to buy gold outright.Just $1 of gold-futures capital flows yield the same gold-price result as $30 of investment capital flows.Gold-futures trading’s impact on gold is wildly disproportionate.

Further amplifying gold-futures speculators’ outsized influence, the American gold-futures price is gold’s global reference one.So when heavy gold-futures selling blasts that headline price lower, the resulting negative psychology quickly infects the rest of the world gold markets.Gold-futures trading is effectively the tail that wags the gold-investment dog.This vexing problem shouldn’t be allowed to exist, but it does.

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Frank Underwood 5 months ago Member's comment

Good stuff.