Adam Hamilton (Adam Hamilton), founder of the 24K99 financial consulting firm Zeal Intelligence, said that in recent months, gold has performed strongly, repeatedly reaching record highs. All of this naturally fuels bullish sentiment and makes traders look forward to more gains. Although the gold bull market is indeed likely to rise sharply in the next few months, the risk of a pullback is increasing. The main short-term driver of gold is speculators' gold futures positions, which have expanded excessively and are about to be reversed.
Adam mentioned, “Either way, these traders have done an excellent job of manipulating the price of gold. Their huge influence stems from the extreme leverage inherent in gold futures. At a gold price of $2,500, each 100 oz futures contract controls assets worth $250,000. However, speculators now only need to keep a cash deposit of $10,500 for each open contract in their account, which is equivalent to a maximum leverage of up to 23.8 times.”
“From this perspective, the legal limit on the stock market has doubled since 1974. Nearly 24 times, the impact of every dollar invested in gold futures on the price of gold is 24 times that of a dollar invested directly. Moreover, the risk of making mistakes is very high, because as long as the price of gold is contrary to speculators' bets, a mere 4.2% fluctuation will wipe out 100% of their risk capital. This has forced these people to maintain a short-sighted ultra-short trading time frame.”
He stressed that this extreme leverage requires focusing on days or hours rather than months or weeks. No one can afford 24x long-term mistakes, which is extremely ruthless. Gold futures speculators must respond quickly to news affecting gold trends and quickly transfer capital. Their most watched catalyst for a long time has been the release of key US economic data, including consumer and wholesale inflation and monthly employment reports.
According to the US Bureau of Labor Statistics, the US economy created only 0.142 million jobs in August, lower than expected 0.161 million. Furthermore, the revised data for the first two months was indeed negative, cutting 0.086 million previously claimed jobs. Adam said, “I've always thought a correction should be added to the current title, which would only increase it by 0.056 million.”
“The internal situation is also not optimistic. In August, the number of bad part-time jobs soared by 0.527 million, while the number of high-quality full-time jobs decreased by 0.438 million. Additionally, 1.325 million native Americans left their jobs, while 0.635 million foreign-born people got jobs. The US Bureau of Labor Statistics first reported in JulyNumber of people employed in non-agricultural industriesFor an increase of 0.114 million compared to an expected increase of 0.185 million, the number of non-farm payrolls rarely fell short of expectations. This is also the second time in a row that it has fallen short of expectations. All of this will undoubtedly benefit the Federal Reserve in cutting interest rates,” he added.
He believes that speculators have long been buying gold futures in droves after the release of the Federal Reserve's dovish employment report, which suggests that the labor market is weak. Their leveraged purchases drove gold to rise sharply, from 1% to more than 2% on the day the employment report was released. However, the initial increase in gold after the release of non-agricultural data was limited to +0.5%. Gold then reversed its decline of 1.5% in intraday trading and then rebounded to close at -0.7%. This unusual weakness raised some concerns.
He further mentioned, “I've heard from many newsletter subscribers why gold is being sold off after such poor monthly employment data. On the same day, some of the Fed's remarks were interpreted as being more hawkish than traders expected, which played a role. However, the main reason for gold's failure to close again was the excessive expansion of speculators' gold futures positions. They don't have much capital firepower at their disposal to make large-scale purchases.”
“Although these people have a huge influence on the price of gold, their ranks are very small. Only a very small percentage of traders are bold or stupid enough to use leverage of 10x, 20x, and sometimes 30x more on volatile gold. Moreover, the total capital they control is very small compared to the wider market. Gold futures speculators can only make limited purchases until they run out of capital firepower.”
“I've found that the best way to deduce how much of this is likely to be usable or consumed is to look at speculators' total long and short positions compared to their trading ranges in recent years. This chart superimposes gold and speculators' total long and short positions to show whether speculators' long and short positions are relatively higher or lower. Considering the current overall position of gold, the risk of gold's pullback is indeed increasing. This means that the opportunity to buy at a lower price is coming.”
(Source: ZeallLC)
The current upward trend of gold has proven to be an extraordinary breakthrough increase. By the end of August, the highest increase in 10.8 months reached 38.7%. The first time gold hit a nominal high in 3.3 years was in early December, and the price of gold has risen 28% since then. A year ago, $2050 seemed pretty high, but now $2,500 is starting to feel normal.
A number of unique drivers contributed to the strong rise in gold. Its core performance was a 20.0% surge in gold prices from mid-February to mid-April. Gold futures purchases undoubtedly played a role in this, and the total number of speculative long contracts soared by 67.3k shares. However, all of this happened during the first half of the gold surge, after which gold futures purchases disappeared.
Adam explained, “Asian investors and central banks around the world have taken over the baton of gold purchases. Since gold futures speculators have limited capital, a rise driven by them alone can usually yield up to 20% to 25%. Due to the central bank's atypical hyperscale purchases, the huge benefits of this challenge of 40% or more have become even greater. However, considering the entire gold upward cycle, speculators are still buying gold futures a lot. They continued to dominate gold for most of this upward cycle.”
“Speculators have always been huge buyers of gold futures; they have bought so much that they have almost exhausted the capital firepower they may have used to propel gold to rise. Crazy short compensation in gold futures has spawned a sharp rise in the price of gold. As early as the beginning of October last year, speculative bears soared to a high of 174.4k contracts, which is not much different from the 3.8-year high of 185.3k set at the end of September 2022. In recent years, speculative bears have received strong long-term support around 95k contracts. By the end of January 2024, they had recovered to this level, but stagnated, then fell strangely sharply at the end of June.”
“This is a long-term low of 4.1 years, which means speculators have completely exhausted their bears' recovery. In fact, these contracts have since rebounded toSupport levelnearby. While speculators are likely to go lower, precedents suggest they are unlikely to go lower, and even if they do, this extreme situation won't last long. From now on, there is far more room for speculators to short sell than to keep buying. This is bad for gold in the short term, and it's also a bit worrying.”
“Speculative bulls are more important to the fate of gold. Since gold rose, the average number of speculative bulls has been 3.3 times higher than that of bears. As a result, bulls have a greater impact on the short-term price trend of gold. As early as October last year, when gold bottomed out, the total amount of speculative bulls was very low, at only 264.8k contracts. But since then, they have surged to 408.5k shares at the end of August, challenging the resistance level.”
“In recent years, this figure has remained around 0.415 million contracts. Although total speculative bulls are likely to spike briefly due to excessive greed and excitement, this surge will be drastically reversed within a few weeks. Once the total speculative bulls hit and surpass their long-term resistance level, there is a high possibility of a reversal. Speculators have little money to continue buying gold futures, so there is more room to sell overly bullish bets.”
“Triggering a massive average return to bullish sell-offs and serious shorting usually requires significant catalysts, such as hawkish inflation data from the Federal Reserve or an upturn in employment data. The most recent example is Employment Friday in early June, when the US Bureau of Labor Statistics reported that the US added 0.272 million new jobs in May, compared to the forecast of 0.19 million. At the close of the day, gold plummeted 3.6%, the biggest one-day decline in 3.6 years.”
Adam looked forward that as the Federal Reserve's long-awaited and highly anticipated next cycle of interest rate cuts is now increasingly scheduled to begin this week's FOMC meeting, speculators don't feel compelled to sell gold futures. Therefore, given the uneven positioning of gold futures, gold is still more elastic than it should be. However, downside risks abound, and speculative bears are still at an ultra-low level, speculative bulls are at a high level, and large-scale sell-offs can break out at any time.
Despite assurances that the Federal Reserve will cut interest rates for the first time next week, the FOMC meeting may still trigger a large-scale sell-off of gold futures. Every time the Federal Reserve makes a decision at the FOMC, it releases its senior official's predictions for the federal funds rate for the next few years. The latest bitmap released in mid-June shows that interest rates will only be cut once by 25 basis points in 2024 and four more times in 2025. Interest rates are expected to be cut by 125 basis points.
By the end of next year, the new bitmap will almost certainly include five or more rate cuts, but that may not be enough for traders. As of August, the implicit interest rate cuts in the Federal Reserve's futures will cut interest rates by a total of 100 basis points in 2024, and will cut interest rates by another 108 basis points in 2025, that is, more than eight times in total.
He went on to mention, “If senior Federal Reserve officials only see six or seven interest rate cuts, goldFutures tradingStaff probably don't like this. Especially if currency traders think that the Federal Reserve's hawkish stance is enough to actually push the dollar higher. Cyclical medium-term upside pullbacks are healthy and critical to rebalancing sentiment, eliminating greed before it spikes to extreme levels. They usually force gold back at least to its 50-day moving average, which is $2,445 in the middle of the week.”
“But in late June and late July, the price of gold both fell below the 50-day moving average. Gold could easily fall all the way to the lower support level of this summer's high consolidation trading range, that is, $2,300. This will result in a total pullback of 8.9% since the end of August, close to the correction level of 10% or more. I didn't anticipate this, but it's not surprising at all. Given speculators' excessive bullishness about gold futures, speculators and investors in gold and gold stocks need to prepare for a bigger sell-off. This includes setting stop losses on trades and preparing shopping lists for new trades when gold starts to bottom out.”
“However, although most of the gold futures that speculators have bought have run out, they don't necessarily have to sell them off anytime soon. If gold continues to rise due to purchases from Asian investors and central banks, speculators may not be frightened to sell off. If senior Federal Reserve officials send a signal to cut interest rates more, more, or faster than traders expected, concerns that gold futures investors might trigger a sell-off will abate. The other factor is the biggest uncertainty in gold.”
“US stock investors, who usually play an important role in driving the sharp rise in gold, played no role in this rise. I wrote a full article not long ago to analyze this and why a rebound in demand for gold will be super beneficial for gold. Sooner or later, gold will rise long enough to eventually attract American stock investors back to gold ETF stocks, thereby accelerating the rise of gold.”
“Major gold ETFs act as channels for large amounts of stock market capital to flow into gold, which can easily overwhelm everything smaller gold futures speculators do. Therefore, before the inevitable return to the mean and the gold futures sell-off begins, this upward trend in gold is likely to rise sharply. However, when total speculative longs are too high and total speculative bears are extremely low, the risk of gold sell-off is still very high.”
Adam pointed out that a healthy pullback not only did not cause fear, but instead created the best mid-term upward buying opportunity. Gold stocks, in particular, have a leverage ratio of about 2 to 3 times the fluctuation in the price of gold materials. Thanks to the current high price of gold, gold mining profits have soared to an astonishing record high.
The price of gold stocks still needs to double to four times to reflect the price of 2,500 US dollars, not to mention where the price of gold stocks will go as this strong long-term bull market continues to grow.
He finally warned: “Any day, some kind of catalyst could trigger a large-scale sell-off of gold futures, which could rapidly expand like a snowball, leading to a sharp correction in gold prices. Especially if the dollar rises sharply due to hawkish news from the Federal Reserve. But that doesn't mean that gold is about to be sold off. If gold continues to rise, Asian investors, central banks, and even US stock investors will soon buy it, and speculators should not rush to sell gold futures.”