Near-Record Gold Shorting

And over the last 8 reported CoT weeks, total spec shorts rose 19.5k contracts.That left them 37% up into their own past-year trading range. That’s not high, but it still leaves a lot more shorts that have to be covered with offsetting buying as gold reverses higher again. Total spec selling since February 19th ran 88.0k contracts, the equivalent of 273.9t of gold. That’s helped force gold 4.8% lower from $1341 to $1276.

The bright side of all this gold-futures selling is it is inherently self-limiting and self-correcting. The more these traders sell, the less they have left to sell. And the higher the odds they will start buying in a big way to mean revert their recent bearish bets back to normal. One of these days some catalyst will arise that will spark major spec gold-futures buying. Gold will surge sharply for weeks as buying normalizes bets.

The biggest casualty of recent months’ extreme near-record gold-futures selling was the gold miners’ stocks, which amplify moves in gold. The major gold miners of the leading GDX VanEck Vectors Gold Miners ETF tend to leverage gold’s action by 2x to 3x. That has weighed on gold-stock prices and psychology since mid-February. GDX slumped while gold-futures speculators battered the gold price lower.

Despite that extreme gold-futures selling nearing records, and incredible stock-market euphoria stunting gold investment demand, the gold stocks have weathered this storm really well. GDX did knife back under its upleg’s support, nearing its 200-day moving average which is much-stronger support.But the major gold stocks have proven impressively resilient overall, largely consolidating high as gold swooned.

Again gold was pounded 4.8% lower over those 8 CoT weeks starting near $1341 and ending way down near $1276. At 2x to 3x normal leverage, the gold stocks would’ve plunged almost 10% to 15%. Yet over that exact span GDX merely slid 5.7%, just 1.2x gold’s loss! And GDX’s leverage was healthy before that as gold rallied, running 2.8x at best by mid-February. The gold stocks have really been holding their own.

Gold stocks are set to surge again once gold reverses decisively higher, which is increasingly likely any day now. These lofty euphoric stock markets are going to inevitably encounter some catalyst sparking significant selling, which will snowball after such a massive and long rally steeped in such epic complacency. Gold investment demand will turn on a dime as stock markets roll over, just like back in early October.

And when gold starts moving higher, the hyper-leveraged gold-futures speculators will rush to buy and pile on to its upside momentum. And after slashing their longs and ramping their shorts over the past couple months, they have major buying to do to reestablish bullish positioning relative to gold to ride its next rally. As leveraged gold-futures capital inflows force gold higher, gold stocks will really amplify its gains.

The last time major gold investment buying lined up with major gold-futures buying by the speculators was in roughly the first half of 2016.That catapulted gold 29.9% higher in 6.7 months kicking off this bull. The major gold stocks as measured by GDX soared 151.2% in essentially that same span, amplifying the big gold gains by 5.1x. Gold stocks are the place to be when traders are pouring capital back into gold!

The bottom line is gold has been bludgeoned by extreme gold-futures selling in the past couple months, culminating in near-record shorting.That’s what forced gold lower during its usual spring-rally timeframe. With investors seduced by the lofty euphoric stock markets, gold-futures speculators have been running roughshod over gold prices.But their heavy selling is self-limiting, and will reverse into proportional buying.

Speculators’ big bearish shift in gold-futures positioning will have to be normalized, resulting in big buying that will push gold higher. That upside momentum could really grow, especially when stock markets roll over and again rekindle gold investment demand. The biggest gains as gold mean reverts back higher will come in the stocks of its miners. They’ve proven resilient as gold swooned, and are poised to surge again.

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Frank Underwood 6 months ago Member's comment

Good stuff.