Gold Futures Firepower Mounts / Commodities / Gold & Silver 2020

Gold’s powerfulpost-stock-panic upleg hasn’t enjoyed buying support from the gold-futuresspeculators.  These influential tradersoften drive and even dominate major gold-price trends.  But they’ve been subtly selling into gold’ssharp recent rally.  Their doggedskepticism is actually very bullish for gold in coming months.  Gold-futures speculators are amassing biggold-futures-buying firepower that will be unleashed.

The maelstrom of extremefear 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 majorstock indexes plummeting 20%+ in 2 weeks or less, even gold was dumped in thefrantic dash for cash.  Similar to priorpanics, gold plunged 12.1% in just 8 trading days.

But that sharp emotionaldrop was wildly-unjustified fundamentally. With stock markets burning and the Fed printing crazy-record sums of newmoney like there’s no tomorrow, gold should’ve been soaring.  So it rapidly V-bounced out of that anomalousstock-panic low, to blast much higher over the next couple months.  Between mid-March to late May, gold surged up18.7% to a 7.5-year secular high near $1748.

Surprisingly the gold-futuresspeculators didn’t participate in that at all!  Usually it’s their buying that births majorgold uplegs, first short covering and later adding new long positions.  Over a few months or so that drives gold highenough fast enough to convince investors to start returning.  Gold-futures buying acts like the starterthat gets the far-larger gold-investment-buying engine running.  But specs have been missing in action.

Gold-futures speculatorswield a majorly-outsized impact on gold prices, so their trading is veryimportant to watch.  That comes from acouple unique attributes of the gold-futures market.  First it allows extreme leverage vastlylarger than any other gold market, amplifying the gold-price impact of gold-futurestrading.  Second, the resultinggold-futures price is gold’s world reference one that has universal psychologicalinfluence.

Since the mid-1970s,the legal limit of leverage in the stock markets has been 2.0x.  Stock traders can only use 50% margin atmost.  Futures trading allows radicallymore.  As of the middle of this week, eachgold-futures contract controlling 100 ounces of gold only required specs keep amaintenance margin of $9,150 cash in their accounts.  Yet at $1725 gold, each 100-ounce contractcontrols $172,500 worth of this metal.

That makes for extreme maximumleverage of 18.9x!  Amazingly that’sactually really low for gold futures.  Mylast essay on this topic in late February warned about gold’s peculiar surge that waslooking toppy at the time.  At that pointmaintenance-margin requirements were much lower so the maximum leverage thatgold-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!  Thatextreme 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 becausegold-futures prices were disconnecting from physical gold prices in the weeksafter mid-March’s stock panic.

At one point in lateMarch, gold-futures prices were $105 per ounce over spot prices!  That appeared to be mostly a COVID-19thing.  Just across the border from hard-hitnorthern Italy, in Switzerland 3 of the world’s largest gold refiners suspendedoperations.  Air travel to move goldbullion around was heavily restricted too. Those disruptions seriously decoupled gold-futures prices from theunderlying physical market.

That, along with hugegold volatility during and after the stock panic, greatly upped the risksof defaults by gold-futures speculators. So margins were nearly doubled, nearly cutting maximum leverage in half.  But still these influential traders punch farabove their weights, moving gold prices far more than their capital wouldsupport at stock-market types of leverage. 19x amplification leaves them a force to be reckoned with.

And specs bullying thegold price around heavily impacts overall gold sentiment.  Everyone else watches the gold-futures price,it is the world reference one.  Thatmakes gold-futures trading often act like the tail wagging the gold-investmentdog.  Specs’ collective trading heavily influencesinvestors’ bullishness or bearishness on gold, and thus their buying andselling.  Investors often follow thegold-futures price’s lead.

Speculators’ aggregategold-futures trading is disclosed weekly in the famous Commitments ofTraders reports.  They are published lateFriday afternoons by the US Commodity Futures Trading Commission, the futures regulators.  All speculators and investors alikeinterested in gold, silver, or their miners’ stocks need to follow this essentialCoT data.  And what it has revealed sincemid-March’s stock panic is stunning!

This chart superimposesgold prices and technicals over speculators’ total long and short contracts ingold futures.  Their upside bets or longsare 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 reasonwhy gold continues to look so bullish even after surging.

Heading into mid-March’sstock panic, gold had powered 42.7% higher over 18.8 months in the biggestupleg of its secular bull.  The primarydriver of that was heavy gold-futures buying by the speculators.  In that span, they added 170.3k longcontracts while buying to cover another 173.3k short ones.  That made for enormous total buying of 343.7kcontracts.  That’s the equivalent of acolossal 1068.9 metric tons of gold!

For comparison considerthe identifiable gold investment demand during that same upleg.  As discussed last week in my latest essay on strong gold investment, thebest daily proxy for gold investment demand is the holdings of the dominant GLDSPDR Gold Shares and IAU iShares Gold Trust gold ETFs.  During that same gold-upleg span, their physicalgold-bullion holdings only grew a much-smaller 190.4t and 123.8t.

These massive American goldETFs that together commanded 42.7% of all the gold bullion held by all theworld’s gold ETFs at the end of Q1 only saw a total 314.2t holdings buildduring this gold bull’s biggest upleg. That’s well under a third of specs’ gold-futures buying!  Their hyper-leveraged trading really movesgold, as is readily apparent in the rest of this gold bull.  Check out its major uplegs and corrections inthis chart.

Prior to this stockpanic fueled by the economic devastation from governments’ draconian lockdownsto slow the spread of COVID-19, spec gold-futures trading drove all themajor gold uplegs and corrections.  331.9kcontracts of buying helped catapult gold 29.9% higher in this bull’s maidenupleg mostly in the first half of 2016. 190.3k contracts of selling blasted gold 17.3% lower in the majorcorrection following that surge.

The spec gold-futuresbuying greatly moderated to just 84.7k contracts in this gold bull’s secondupleg straddling 2017, resulting in a way-smaller 20.4% gold gain.  Spec gold-futures selling resumed with avengeance after that, with 227.2k contracts of selling hammering gold 13.6%lower into summer 2018.  Then thatbiggest upleg was born, again 343.7k contracts of spec gold-futures buyingblasted gold 42.7% higher!

These leveraged traders’buying grew so extreme in late February that their total longs soared way up toan all-time-record high of 473.2k contracts!  That anomaly actually proved reallyfortuitous for prudent traders watching this data.  Again I wrote about gold’s peculiar surge atthe time, pointing out specs were all-in gold. They had effectively run out of room to add more longs, and run out ofroom to cover more shorts.

Total spec longs andshorts were running 100% and 6% up into their gold-bull trading ranges then.  That was close to the most-bearish-possibleread for gold of 100% longs and 0% shorts.  That implies specs’ available capital firepowerto buy more longs is exhausted, making big selling far more likely.  And with very-low shorts, they can’t do muchmore short-covering buying either.  That’sreally bearish for gold.

So in February we notonly recommended our newsletter subscribers liquidate all their gold-stock trades,but we added put options and inverse-leveraged-ETF trades actively shortingthem.  That proved super-fortunate soonafter 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 ingold.

Heavy spec gold-futuresselling played a role in hammering gold in mid-March, as during that brutal 8-trading-dayspan 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 asingle CoT week, masking individual trading days’ gold-futures action.

But what speculatorshave been doing in gold futures since gold’s V-bounce is remarkable.  Note in this chart that while gold has spikedsharply, total spec longs didn’t follow! Gold surged 18.7% without the speculators buying any goldfutures!  From gold’s panic low to itslatest interim high in late May, total spec longs actually fell 13.5k contractswhile shorts slipped 2.0k.  That makesfor 11.5k contracts of net selling.

Gold-futuresspeculators have sat out this entire post-stock-panic gold upleg so far!  The latest CoT data before this essay waspublished is current to June 9th.  At thatpoint total spec longs were running just 318.9k contracts.  Major gold uplegs are slain by excessively-bullish spec gold-futures positioning.  Thatturned out to be the then-record 440.4k longs in July 2016 and the new-record473.2k in February 2020.

The current spec-longpositioning is still 121.5k contracts under the former and 154.3k under the latter!  Average those differences, and specs stillhave room to buy another 137.9k long contracts before this gold upleg isforced go give up its ghost on spec buying exhaustion.  That’s the equivalent of 428.9t of gold, whichis big!  The total GLD and IAU buying inthis post-panic upleg have been 190.1t and 54.5t.

Today’s total speclongs are only running 46% up into their own trading range since this seculargold bull was born in mid-December 2015. That’s closer to the most-bullish-for-gold 0% longs than the oppositemost-bearish-for-gold 100% longs.  And ifyou 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 ishighly unlikely to fail before specs are all-in, and they have major buyingleft to do from here to get there!  Theirlack of psychological and actual buy-in to this gold upleg after such a big gainis amazing.  Usually once gold investmentbuying 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 shortpositioning is nowhere near as bullish. While spec shorting has ramped a bit out of its deep 8.2-year secularlow in late April, total spec shorts are still just running 13% up into theirgold-bull trading range.  That’s bearishfor gold, close to the most-bearish-possible 0% which means specs are all-out shortswith vast room to short sell aggressively. But this is a secondary consideration today for a few reasons.

Because hyper-leveragedgold-futures trading is so exceedingly risky, speculators don’t want to bet toobig against gold near major highs.  Afterthis gold bull’s fast maiden upleg into the summer of 2016, there was no significantnew short selling even as gold corrected hard on heavy long dumping.  Specs don’t get bold on short selling until manymonths after gold sees new highs.  Bearish-enoughpsychology is slow to build.

In terms of their more-recentpast-year trading range, total spec shorts look much higher at 50% up intoit.  That’s right between thatmost-bearish-possible-for-gold 0% and the most-bullish-possible 100%.  But the primary reason I’m not concernedabout today’s low spec shorts is purely mathematical.  Note in this chart how much higher the greenspec longs line is almost always compared to the red spec shorts one.

During this entire seculargold bull, the weekly total spec longs and shorts have averaged 313.2k and120.6k 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 longor short contract is identical.  And withspecs’ upside bets usually running multiples higher than their downside ones, howthey trade longs has a bigger impact.

With gold-futuresspeculators refusing to participate in gold’s sharp post-panic upleg so far,why can gold still power higher?  Thereason is strong investmentdemand, which I discussed in depth in last week’s essay.  This updated chart from there shows this goldbull superimposed over GLD’s holdings.  Gold’sexact-same uplegs and corrections are noted, so you can compare gold-futuresaction to investment buying.

Gold investment demand hasexploded since the stock panic, which is what has catapulted gold 18.7%higher at best so far.  During that same young-uplegspan where speculators sold 11.5k contracts of gold futures, GLD’s holdingssurged 20.6% or 190.1t higher!  IAU’s parallelbuild was 14.3% or 54.5t.  Between the panic’sheavy psychological damage and the Fed’s colossal inflation since, investors areflocking to gold.

For years after theshocking plummetings of stock panics, investors remember that stock marketsfall as well as rise.  So they up theirallocations in gold to prudently diversify their stock-heavy portfolios.  And as of mid-June, the Fed’s balance sheethas skyrocketed 66.3% or $2,857.0b higher in just 3.0 months since that stockpanic!  Gold has never been moreimportant to own with the US-dollar supply soaring by 2/3rds.

Consider a finalmeasure of investment buying versus gold-futures trading.  Instead of running from the stock-panic lowto gold’s latest interim high in late May, extend that span out to the middleof 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.  Thatmakes for a hefty 280.0t of identifiable gold investment buying since gold sufferedits stock-panic nadir.

That’s already almost asmuch gold investment as that 314.2t total holdings build of GLD and IAU during gold’sentire prior 42.7% upleg over 18.8 months into late February!  Meanwhile total spec longs have plunged 49.8kcontracts in this extended span, while their total shorts have climbed8.4k.  That makes for total selling of58.3k, the equivalent of 181.2t of gold. That has offset nearly 2/3rds of the investment buying.

That’s the main reasonwhy gold has consolidated high since late May, spec gold-futures selling hasbeen warring with investment buying. Imagine how this gold upleg will accelerate once speculators decide tostop fighting it and pile in.  That willprobably happen fairly soon, as all gold-futures speculators can care aboutgiven their leverage and risks is correctly riding short-term trends.  And gold’s inarguably remains higher.

After the last stockpanic in late 2008, gold investment demand remained elevated for years.  That helped push gold 166.5% higher in the 2.8years after that panic’s bottoming.  So thislatest 18.7% upleg over 2.0 months is nothing so far.  Gold has a lot higher to run yet beforeinvestors get sufficiently diversified and the traumatic memories of the stockpanic fade.  Gold-futures speculatorswill throw long amplifying those gains.

The biggestbeneficiaries of post-stock-panic gold bulls are the stocks of its miners.  After that late-2008 stock panic, the leadingGDX VanEck Vectors Gold Miners ETF soared 307.0% higher over the next 2.9 years!  The major gold stocks tend to amplify gold’supside by 2x to 3x, while the smaller fundamentally-superior mid-tier gold miners fareeven better.  So if you are bullish ongold, you need to own great gold stocks.

At Zeal we started aggressivelybuying and recommending fundamentally-superior gold and silver miners in our weekly and monthly subscriptionnewsletters back in mid-March right after the stock-panic lows.  We’ve been layering into new positions eversince, with unrealized gains already growing huge.  Today our trading books are full of these fundamentally-thrivinggold and silver miners that aren’t done running yet.

To profitably trade high-potentialgold stocks, you need to stay informed about the broader market cycles that drivegold.  Our newsletters are a great way,easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, why, and how to trade them with specific stocks.  Subscribe today and take advantageof our 20%-off sale!  Seizethis gold-stock consolidation to mirror our many winning trades before this majorupleg runs again.

The bottom line is gold-futuresspeculators haven’t been participating in gold’s strong post-panic upleg sofar.  These influential traders who oftendominate gold’s price action through extreme leverage not only haven’t beenbuying, they’ve been modest sellers.  Theirskepticism apparent through their positioning is the reason gold has consolidatedhigh.  But their selling is building uptheir capital firepower for later buying.

As strong investment demandcontinues pushing gold higher on balance, sooner or later the gold-futuresspeculators will join in to ride this upleg. Their current lukewarm positioning leaves big room to buy, which willreally amplify gold’s coming gains.  Thisgold upleg isn’t in danger of failing until these traders’ bets grow excessively-bullishagain.  The long buying runway before thatis very bullish for gold and gold stocks.

Adam Hamilton, CPA

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