Last Sunday, an enormous number of gold contracts were dumped on the futures market, crashing the price below 1680 before it reversed. The week prior, gold was trading over 1800. This activity may seem strange, but it is very common with Gold and you just have to deal with it when trading in this market.
Here’s the part I find interesting:
You can get the attached commitment of traders reports here: https://www.cftc.gov/MarketReports/CommitmentsofTraders/index.htm
Swap dealers include the bullion banks, which are large banks routinely trading in gold futures contracts. They create the market for gold futures, taking the other side of the residual trades in the market.
Gold producers are almost always short because they are hedging the risk of their mining activities, ensuring that their gold will be sold at a profit after the time and expenses involved. The only times you see them go to neutral or slightly long is when gold prices drop below the cost of production and they start shuttering mines.
Managed money is the big investment funds, and other reportables is a wide swath of remaining sizeable players including central banks.
When gold investors greatly outweigh producer hedges, the swap dealers end up short. They are notorious amongst gold investors for hammering down the price of gold by dumping large numbers of contracts at thinly traded times in order to “run the stops.” Managed money includes a lot of algorithmic and momentum traders, often using stop losses and trading around price targets.
Last Sunday, the swap dealers dumped a lot of contracts on the market to hit some anticipated trigger points, and it worked very well. Not only did stop losses cause managed money to dump 26,486 long contracts, but price signals got momentum algos to open 29,162 short contracts. The swap dealers got to reduce their net short exposure by 32,710 even while the producers got less short and other reportables got considerably more long.
What does this mean? I’m thinking a it’s a possible sign of capitulation. While the bullion banks may try to stop out a few more longs, managed money is near it’s annual low in net bullish exposure so there might not be many more long positions that can be easily flushed out.
Gold is a market that routinely frustrates traders. The activity discussed above means it often has false breakouts and false breakdowns, making it difficult to use traditional technical analysis on shorter timeframes. Moves can be exaggerated, with painfully long corrections that can be followed by relatively swift up moves that are easy to miss.
I often point out that gold has many narratives. It can go up with inflation, as gold meaured in your local currency goes up while that currency drops. It can go up with negative real interest rates, as investors trying to diversify their holdings from stocks become less comfortable with bonds. It can go up with emerging markets or asian markets as the citizens of these countries tend to be big holders of physical gold. It can be a safe haven when investors struggle to find any asset they can trust. In a sense, the gold price is tossed around by many powerful and often competing forces causing the dominant narratives to fluctuate. Traders often get frustrated by this because they get too fixed on one or two narratives, and their signals simply stop working when the dominant narratives switch.
My favorite narrative is the de-dollarization of foreign trade. Major countries including China are tired of being reliant on US dollars for all of their foreign trade. Reasons include persistent Eurodollar shortages, booms and busts from foreign investment flows, and the keenly felt political pressure of US government sanctions. These countries aim to increase their trade in other currencies, such as China using the belt-and-road initiative to encourage trade in their own currency. This reduces their need to for their central banks to hold US dollars. Gold is a primary beneficiary of this sort of central bank reallocation because central banks have held it as an asset throughout their existence, and skeptical governments like having an asset that can’t be created at will by foreign powers. Note that this is a slow process and I expect the US dollar to dominate trade volumes beyond 2030. I just expect this process to provide a bullish backdrop for gold.
Here’s how my portfolio ended up:
- DOWNSIDE BETS (29.5%)
- 22.1% TLT Calls
- 5.9% IWM Puts
- 1.5% EEM Puts
- PRECIOUS METALS (42.1%)
- 10.0% AG (Silver), mainly shares some calls
- 6.9% SAND (Gold, Silver & others), all calls
- 4.5% EQX (Gold), shares & calls
- 4.5% SILV (Silver)
- 3.8% LGDTF (Gold)
- 3.9% MTA (Gold & Silver)
- 3.3% SILVRF (Silver)
- 1.5% WPM (Gold, Copper & Silver), all calls
- 1.4% MGMLF (Gold)
- 1.4% RSNVF (Silver)
- 0.5% SSVFF (Silver)
- 0.6% GOLD (Gold, Copper), all calls
- OTHER COMMODITIES (17.5%)
- 6.4% NOVRF (Nickel/Copper)
- 6.2% CCJ (Uranium)
- 3.4% UUUU (Uranium, Vanadium, Copper)
- 1.5% BQSSF (Uranium)
- CANNABIS (5.5%) split btw CRLBF, GTBIF & TRSSF
- CRYPTO (2.8%) all ADA
- CASH (2.7%)
Note that my portfolio declined by 7% over the past 2 weeks. I took advantage of the dump in miners by picking up MGMLF, but I haven’t made any other notable trades – aside from slightly reducing my crypto holdings into this fantastic rally.
My outlook hasn’t changed considerably. I’ll lay it out though.
- I’m still very concerned about the US stock market based on
- Extremely high US valuations driven by a small number of individual stocks
- A sharply reduced credit pulse from China
- US government largesse of the 2020’s dying off
- I am firmly in the deflationist camp as I see large and rising debt levels as a growing monetary black hole, which pulls more and more money away from everything else.
- This means I expect government interest rates to stay low and likely drop further, hence my heavy bullish allocation to TLT.
- This does not mean that I expect living costs to go down. I simply expect the trend to continue where costs of living rise significantly higher than wages, giving the average person less money to spend on other things.
- The CPI does not reflect the basic cost of living; it is heavily weighted by consumer discretionary spending, hedonic adjustments (costs rise but quality adjustments offset to make costs lower in the measurement), and housing as an “owner’s equivalent rent” fudge number which doesn’t tend to reflect cost increases well.
- I am bullish on the mining sector because of
- Significant underinvestment in mining over the last decade with lengthy downside corrections in precious metals and Uranium in particular. It takes a lot of time to go through the exploration/development/production cycle in mining so these long periods of underinvestment can turn into long periods of supply constraints.
- Increased need for Uranium in the future as many countries – particularly in emerging markets and Asia – as they are building a lot of nuclear plants to produce a lot more power without the environmental side-effects of coal or the price swings of oil and natural gas.
- Increased need for battery metals in the future as more and more spending is driven by government infrastructure projects, environmental regulations, and other subsidies towards anything considered green. Wind plants require enormously oversized copper power cables over long distances, solar plants require a lot of silver, copper, and other metals in their process, batteries and electric vehicles require a lot of copper and specialty metals.
As a final note, I don’t plan on skipping many weeks on my blog, but last weekend was very busy for me and I’ve been busier than ever at work. Good luck and happy trading!