Gold-Futures Buying Yet to Start

Gold has powered higher in a strong new upleg since the Fed’s mid-December rate hike. But the core group of traders who usually fuel early-upleg gains has been missing in action in recent months. The gold-futures speculators have not done any meaningful buying since gold bottomed. This anomaly is a very-bullish omen for gold. Since these traders’ buying has yet to start, they need to do lots of catch-up buying.
Since the day after the Fed’s second rate hike in 10.5 years in mid-December, gold has surged 10.0% higher at best as of the middle of this week. Naturally these strong gains were really amplified by the gold miners’ stocks. The leading GDX VanEck Vectors Gold Miners ETF blasted 34.6% higher over that same short span, trouncing the broad-market S&P 500’s mere 1.4% gain! The gold sector is really shining.
But nevertheless it’s been a strange gold upleg distorted by the markets’ extreme Trumphoria. Normally new gold uplegs see a distinct three-stage buying pattern that fuels their advances. Gold’s initial gains off lows are driven by futures speculators buying to cover their shorts. The resulting gold reversal and surge entices in still more futures speculators on the long side, which really accelerates gold’s upside.
This early gold-futures buying is essential, single-handedly pushing gold high enough for long enough to reach critical mass psychologically. That finally attracts investors to return, convincing them gold’s new upleg is real and sustainable. They command vastly-larger pools of capital than speculators, and fuel most of gold uplegs’ gains. Futures speculators jump start the gold-driving engine of investment buying.
This gold-upleg buying sequence has proven the standard for so many years now that it’s really hard to imagine it playing out any other way. Speculators and investors have very-different mindsets and risk tolerances, making them uniquely suited to buy at particular times. When gold hits a deep low in extreme bearishness after a major correction, the only buyers are speculators covering shorts to realize profits.
Gold futures actually have a wildly-outsized impact on gold prices, punching way above their weight in capital terms. The main reason is the extreme leverage inherent in futures trading. While the decades-old legal limit for leverage in the stock markets is 2x, it can run as high as 25x in gold-futures trading! So relatively-large amounts of gold can be controlled with relatively-small amounts of capital through futures.

This post was published at ZEAL LLC on February 24, 2017.