Near-Record Gold Shorting

Over the past couple months as mounting stock-market euphoria seduced investment capital out of gold, speculators’ gold-futures selling has soared to extremes at times.That really exacerbated the counter-seasonal downside pressure on gold prices.This heavy selling is evident in the weekly Commitments of Traders reports from the CFTC, which detail speculators’ collective long and short positions in gold futures.

This chart superimposes several years of daily gold prices in blue over the weekly CoT data.Total spec long contracts are shown in greed, and total shorts in red.The falling longs and rising shorts since gold last peaked near $1341 in mid-February are a big reason for its recent weakness.But the lower specs push their longs and the higher they ramp their shorts, the more bullish gold’s near-term outlook grows.

A couple weeks ago I dug deeper into gold futures’ impact on gold prices in recent years, so I’m going to focus on recent months here.On February 19th when gold surged to $1341, total spec longs and shorts were running 305.0k and 138.5k contracts.While those longs remained way below recent years’ peaks, they were still near the highest levels seen in the past year.I developed a simple metric to quantify that.

This chart shows the general rule on gold futures trading driving gold price action. When speculators are buying by either adding new longs or covering existing shorts, gold rallies. When they are selling existing longs or adding new shorts, gold retreats.  So the lower spec longs, and the higher spec shorts, the more bullish gold’s near-term outlook.The opposite is also true, higher longs and lower shorts are bearish for gold.

Gold’s biggest uplegs in recent years emerged from relatively-low spec longs and/or relatively-high spec shorts. Figuring out how low or high both sides of this trade happen to be can be done by looking at current levels compared to their trading ranges over the past year. When gold peaked at $1341 9 weeks ago, total spec longs were running 96% up into their 52-week trading range. That was certainly relatively high.

That left speculators little room to buy more gold-futures long contracts unless they expanded their total capital allocation back to bigger prior-year levels.If they didn’t, they had a lot more room to sell than to buy. That same CoT week, total spec shorts were running 32% up into their own past-year trading range. Thus the short-side guys had probable remaining room to cover 1/3rd of their shorts, which was relatively low.

If investors had been buying gold, if the mounting stock euphoria hadn’t been sucking capital out of gold, speculators’ gold-futures positioning wouldn’t have mattered much. But with investors missing in action, the gold-futures traders were ruling the roost. And they started selling heavily in the CoT week ending on Tuesday March 5th. Be aware that CoT weeks always run from Tuesday closes to Tuesday closes.

Gold began that CoT week looking great, trading at $1328. But speculators started selling gold futures, pushing gold down towards $1300. That is a hugely-important psychological level for gold, which seems to attract gold-futures stop losses like gravity. So as $1300 neared and failed, gold-futures selling ramped up massively.That CoT week ended with specs dumping 34.0k long contracts while adding 11.9k short ones!

A 20k+ contract change in either spec longs or shorts in a single CoT week is the threshold where huge begins. 20k contracts control the equivalent of 62.2 metric tons of gold, way too much for normal markets to absorb in a single week. That big bout of spec gold-futures long selling that kicked off the last couple months’ gold slump was exceptional.At that point 1053 CoT weeks had passed since early 1999, a long span.

That CoT week’s spec long selling ranked as the 20th largest ever witnessed, a rare event. And in terms of speculators’ total gold-futures selling including both longs and shorts, it was the 11th largest on record! It’s important to realize that gold-futures selling of that magnitude is unusual, unsustainable, and self-limiting. The lower spec longs and the higher spec shorts, the less gold futures these traders have left to sell.

That extreme selling blitz puking out the equivalent of 142.6t of gold in a single CoT week would probably have been the end of it without the growing stock-market euphoria. Gold usually carves a major seasonal low in mid-March before powering higher in its spring rally. But with the S&P 500 levitating and investors still selling gold on balance, sentiment stayed fairly bearish so gold-futures specs had the run of the market.

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Frank Underwood 3 months ago Member's comment

Good stuff.