As strong investment demand continues pushing gold higher on balance, sooner or later the gold-futures speculators will join in to ride this upleg…
Gold’s powerful post-stock-panic upleg hasn’t enjoyed buying support from the gold-futures speculators. These influential traders often drive and even dominate major gold-price trends. But they’ve been subtly selling into gold’s sharp recent rally. Their dogged skepticism is actually very bullish for gold in coming months. Gold-futures speculators are amassing big gold-futures-buying firepower that will be unleashed.
The maelstrom of extreme fear spawned by mid-March’s stock panic even briefly sucked in gold. It had surged to a 7.1-year secular high of $1675 during the initial weeks of that heavy stock-market selling. But once that went panic-grade, which is major stock indexes plummeting 20%+ in 2 weeks or less, even gold was dumped in the frantic dash for cash. Similar to prior panics, gold plunged 12.1% in just 8 trading days.
But that sharp emotional drop was wildly-unjustified fundamentally. With stock markets burning and the Fed printing crazy-record sums of new money like there’s no tomorrow, gold should’ve been soaring. So it rapidly V-bounced out of that anomalous stock-panic low, to blast much higher over the next couple months. Between mid-March to late May, gold surged up 18.7% to a 7.5-year secular high near $1748.
Surprisingly the gold-futures speculators didn’t participate in that at all! Usually it’s their buying that births major gold uplegs, first short covering and later adding new long positions. Over a few months or so that drives gold high enough fast enough to convince investors to start returning. Gold-futures buying acts like the starter that gets the far-larger gold-investment-buying engine running. But specs have been missing in action.
Gold-futures speculators wield a majorly-outsized impact on gold prices, so their trading is very important to watch. That comes from a couple unique attributes of the gold-futures market. First it allows extreme leverage vastly larger than any other gold market, amplifying the gold-price impact of gold-futures trading. Second, the resulting gold-futures price is gold’s world reference one that has universal psychological influence.
Since the mid-1970s, the legal limit of leverage in the stock markets has been 2.0x. Stock traders can only use 50% margin at most. Futures trading allows radically more. As of the middle of this week, each gold-futures contract controlling 100 ounces of gold only required specs keep a maintenance margin of $9,150 cash in their accounts. Yet at $1725 gold, each 100-ounce contract controls $172,500 worth of this metal.
That makes for extreme maximum leverage of 18.9x! Amazingly that’s actually really low for gold futures. My last essay on this topic in late February warned about gold’s peculiar surge that was looking toppy at the time. At that point maintenance-margin requirements were much lower so the maximum leverage that gold-futures speculators could run was 32.0x. That’s way closer to historical norms than today’s levels.
Nevertheless even at 19x, every dollar gold-futures speculators deploy has 19x the gold-price impact of a dollar invested outright! That extreme leverage is certainly risky, as a mere 5.3% adverse move against specs’ positions would wipe out 100% of their capital deployed. Cash margins were likely raised because gold-futures prices were disconnecting from physical gold prices in the weeks after mid-March’s stock panic.
At one point in late March, gold-futures prices were $105 per ounce over spot prices! That appeared to be mostly a COVID-19 thing. Just across the border from hard-hit northern Italy, in Switzerland 3 of the world’s largest gold refiners suspended operations. Air travel to move gold bullion around was heavily restricted too. Those disruptions seriously decoupled gold-futures prices from the underlying physical market.
That, along with huge gold volatility during and after the stock panic, greatly upped the risks of defaults by gold-futures speculators. So margins were nearly doubled, nearly cutting maximum leverage in half. But still these influential traders punch far above their weights, moving gold prices far more than their capital would support at stock-market types of leverage. 19x amplification leaves them a force to be reckoned with.
And specs bullying the gold price around heavily impacts overall gold sentiment. Everyone else watches the gold-futures price, it is the world reference one. That makes gold-futures trading often act like the tail wagging the gold-investment dog. Specs’ collective trading heavily influences investors’ bullishness or bearishness on gold, and thus their buying and selling. Investors often follow the gold-futures price’s lead.
Speculators’ aggregate gold-futures trading is disclosed weekly in the famous Commitments of Traders reports. They are published late Friday afternoons by the US Commodity Futures Trading Commission, the futures regulators. All speculators and investors alike interested in gold, silver, or their miners’ stocks need to follow this essential CoT data. And what it has revealed since mid-March’s stock panic is stunning!
This chart superimposes gold prices and technicals over speculators’ total long and short contracts in gold futures. Their upside bets or longs are rendered in green, and their downside bets or shorts are shown in red. Very unusually they’ve been sitting out gold’s powerful post-panic upleg, and subtly betting against it! This surprising development is a big reason why gold continues to look so bullish even after surging.
Heading into mid-March’s stock panic, gold had powered 42.7% higher over 18.8 months in the biggest upleg of its secular bull. The primary driver of that was heavy gold-futures buying by the speculators. In that span, they added 170.3k long contracts while buying to cover another 173.3k short ones. That made for enormous total buying of 343.7k contracts. That’s the equivalent of a colossal 1068.9 metric tons of gold!
For comparison consider the identifiable gold investment demand during that same upleg. As discussed last week in my latest essay on strong gold investment, the best daily proxy for gold investment demand is the holdings of the dominant GLD SPDR Gold Shares and IAU iShares Gold Trust gold ETFs. During that same gold-upleg span, their physical gold-bullion holdings only grew a much-smaller 190.4t and 123.8t.
These massive American gold ETFs that together commanded 42.7% of all the gold bullion held by all the world’s gold ETFs at the end of Q1 only saw a total 314.2t holdings build during this gold bull’s biggest upleg. That’s well under a third of specs’ gold-futures buying! Their hyper-leveraged trading really moves gold, as is readily apparent in the rest of this gold bull. Check out its major uplegs and corrections in this chart.
Prior to this stock panic fueled by the economic devastation from governments’ draconian lockdowns to slow the spread of COVID-19, spec gold-futures trading drove all the major gold uplegs and corrections. 331.9k contracts of buying helped catapult gold 29.9% higher in this bull’s maiden upleg mostly in the first half of 2016. 190.3k contracts of selling blasted gold 17.3% lower in the major correction following that surge.
The spec gold-futures buying greatly moderated to just 84.7k contracts in this gold bull’s second upleg straddling 2017, resulting in a way-smaller 20.4% gold gain. Spec gold-futures selling resumed with a vengeance after that, with 227.2k contracts of selling hammering gold 13.6% lower into summer 2018. Then that biggest upleg was born, again 343.7k contracts of spec gold-futures buying blasted gold 42.7% higher!
These leveraged traders’ buying grew so extreme in late February that their total longs soared way up to an all-time-record high of 473.2k contracts! That anomaly actually proved really fortuitous for prudent traders watching this data. Again I wrote about gold’s peculiar surge at the time, pointing out specs were all-in gold. They had effectively run out of room to add more longs, and run out of room to cover more shorts.
Total spec longs and shorts were running 100% and 6% up into their gold-bull trading ranges then. That was close to the most-bearish-possible read for gold of 100% longs and 0% shorts. That implies specs’ available capital firepower to buy more longs is exhausted, making big selling far more likely. And with very-low shorts, they can’t do much more short-covering buying either. That’s really bearish for gold.
So in February we not only recommended our newsletter subscribers liquidate all their gold-stock trades, but we added put options and inverse-leveraged-ETF trades actively shorting them. That proved super-fortunate soon after when that inherently-unpredictable stock panic arrived. While no one could’ve foreseen that extreme, spec gold-futures positioning had pointed to an imminent major correction in gold.
Heavy spec gold-futures selling played a role in hammering gold in mid-March, as during that brutal 8-trading-day span where gold plummeted 12.1% specs dumped 49.3k gold-futures contracts. I suspect their actual selling was bigger, but is hidden behind the coarse weekly resolution of the CoT reports. Gold plummeted and then V-bounced within a single CoT week, masking individual trading days’ gold-futures action.
But what speculators have been doing in gold futures since gold’s V-bounce is remarkable. Note in this chart that while gold has spiked sharply, total spec longs didn’t follow! Gold surged 18.7% without the speculators buying any gold futures! From gold’s panic low to its latest interim high in late May, total spec longs actually fell 13.5k contracts while shorts slipped 2.0k. That makes for 11.5k contracts of net selling.
Gold-futures speculators have sat out this entire post-stock-panic gold upleg so far! The latest CoT data before this essay was published is current to June 9th. At that point total spec longs were running just 318.9k contracts. Major gold uplegs are slain by excessively-bullish spec gold-futures positioning. That turned out to be the then-record 440.4k longs in July 2016 and the new-record 473.2k in February 2020.
The current spec-long positioning is still 121.5k contracts under the former and 154.3k under the latter! Average those differences, and specs still have room to buy another 137.9k long contracts before this gold upleg is forced go give up its ghost on spec buying exhaustion. That’s the equivalent of 428.9t of gold, which is big! The total GLD and IAU buying in this post-panic upleg have been 190.1t and 54.5t.
Today’s total spec longs are only running 46% up into their own trading range since this secular gold bull was born in mid-December 2015. That’s closer to the most-bullish-for-gold 0% longs than the opposite most-bearish-for-gold 100% longs. And if you look at total spec longs compared to where they’ve been during the past year, they are 0% up into their 52-week range! Specs have lots of room yet to drive gold higher.
This gold upleg is highly unlikely to fail before specs are all-in, and they have major buying left to do from here to get there! Their lack of psychological and actual buy-in to this gold upleg after such a big gain is amazing. Usually once gold investment buying gets underway, spec gold-futures buying has largely been expended. But today specs’ capital firepower for buying is still mounting, which is a very-bullish omen for gold.
Realize spec short positioning is nowhere near as bullish. While spec shorting has ramped a bit out of its deep 8.2-year secular low in late April, total spec shorts are still just running 13% up into their gold-bull trading range. That’s bearish for gold, close to the most-bearish-possible 0% which means specs are all-out shorts with vast room to short sell aggressively. But this is a secondary consideration today for a few reasons.
Because hyper-leveraged gold-futures trading is so exceedingly risky, speculators don’t want to bet too big against gold near major highs. After this gold bull’s fast maiden upleg into the summer of 2016, there was no significant new short selling even as gold corrected hard on heavy long dumping. Specs don’t get bold on short selling until many months after gold sees new highs. Bearish-enough psychology is slow to build.
In terms of their more-recent past-year trading range, total spec shorts look much higher at 50% up into it. That’s right between that most-bearish-possible-for-gold 0% and the most-bullish-possible 100%. But the primary reason I’m not concerned about today’s low spec shorts is purely mathematical. Note in this chart how much higher the green spec longs line is almost always compared to the red spec shorts one.
During this entire secular gold bull, the weekly total spec longs and shorts have averaged 313.2k and 120.6k contracts. With 2.6x more longs, they are 2.6x more important for moving the gold price than shorts! The gold-price impact of buying or selling a long or short contract is identical. And with specs’ upside bets usually running multiples higher than their downside ones, how they trade longs has a bigger impact.
With gold-futures speculators refusing to participate in gold’s sharp post-panic upleg so far, why can gold still power higher? The reason is strong investment demand, which I discussed in depth in last week’s essay. This updated chart from there shows this gold bull superimposed over GLD’s holdings. Gold’s exact-same uplegs and corrections are noted, so you can compare gold-futures action to investment buying.
Gold investment demand has exploded since the stock panic, which is what has catapulted gold 18.7% higher at best so far. During that same young-upleg span where speculators sold 11.5k contracts of gold futures, GLD’s holdings surged 20.6% or 190.1t higher! IAU’s parallel build was 14.3% or 54.5t. Between the panic’s heavy psychological damage and the Fed’s colossal inflation since, investors are flocking to gold.
For years after the shocking plummetings of stock panics, investors remember that stock markets fall as well as rise. So they up their allocations in gold to prudently diversify their stock-heavy portfolios. And as of mid-June, the Fed’s balance sheet has skyrocketed 66.3% or $2,857.0b higher in just 3.0 months since that stock panic! Gold has never been more important to own with the US-dollar supply soaring by 2/3rds.
Consider a final measure of investment buying versus gold-futures trading. Instead of running from the stock-panic low to gold’s latest interim high in late May, extend that span out to the middle of this week. In that 3.0-month timeframe, GLD’s holdings have soared by 23.2% or 214.0t. IAU’s are up 17.3% or 66.0t. That makes for a hefty 280.0t of identifiable gold investment buying since gold suffered its stock-panic nadir.
That’s already almost as much gold investment as that 314.2t total holdings build of GLD and IAU during gold’s entire prior 42.7% upleg over 18.8 months into late February! Meanwhile total spec longs have plunged 49.8k contracts in this extended span, while their total shorts have climbed 8.4k. That makes for total selling of 58.3k, the equivalent of 181.2t of gold. That has offset nearly 2/3rds of the investment buying.
That’s the main reason why gold has consolidated high since late May, spec gold-futures selling has been warring with investment buying. Imagine how this gold upleg will accelerate once speculators decide to stop fighting it and pile in. That will probably happen fairly soon, as all gold-futures speculators can care about given their leverage and risks is correctly riding short-term trends. And gold’s inarguably remains higher.
After the last stock panic in late 2008, gold investment demand remained elevated for years. That helped push gold 166.5% higher in the 2.8 years after that panic’s bottoming. So this latest 18.7% upleg over 2.0 months is nothing so far. Gold has a lot higher to run yet before investors get sufficiently diversified and the traumatic memories of the stock panic fade. Gold-futures speculators will throw long amplifying those gains.
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The bottom line is gold-futures speculators haven’t been participating in gold’s strong post-panic upleg so far. These influential traders who often dominate gold’s price action through extreme leverage not only haven’t been buying, they’ve been modest sellers. Their skepticism apparent through their positioning is the reason gold has consolidated high. But their selling is building up their capital firepower for later buying.
As strong investment demand continues pushing gold higher on balance, sooner or later the gold-futures speculators will join in to ride this upleg. Their current lukewarm positioning leaves big room to buy, which will really amplify gold’s coming gains. This gold upleg isn’t in danger of failing until these traders’ bets grow excessively-bullish again. The long buying runway before that is very bullish for gold and gold stocks.
Adam Hamilton, CPA