Gold Selling Exhausting

Gold has been afflicted by relentless selling over the past few weeks or so, forcing it to major lows. While summer-doldrums weakness is typical, gold’s recent drop is on the large side even for this time of year. It was fueled by truly-extreme short selling by gold-futures speculators, which is quickly exhausting. That is paving the way for gold’s major autumn rally to start marching higher any day now, a very-bullish omen. A month ago when gold was still near $1300, I published my latest research on its summer doldrums. The first halves of market summers including Junes and early Julies have long tended to be the weakest times of the year seasonally for gold. They are simply devoid of the recurring seasonal demand surges gold enjoys during most of the rest of the year. With investors not interested in buying, gold languishes. There are no major income-cycle or cultural drivers of outsized gold investment demand during these vexing summer doldrums. And many investors are mentally checked out anyway, enjoying the summer vacation season with their families. So gold usually drifts listlessly sideways to lower in early summers. Sometimes enough bearishness coalesces to catalyze significant selling, which is certainly the case this year. This first chart is updated from my recent summer-doldrums essay, revealing how gold has performed in market summers in modern bull-market years. They run from 2001 to 2012, skip over the intervening bear years of 2013 to 2015, then recommence in 2016 to 2018. Because gold’s price varied so greatly over this span, all individual years’ summer price action is indexed to 100 as of Mays’ final closes each year. The individual summer trading patterns of all these bull-market years from 2001 to 2017 are rendered in yellow. Together they define gold’s typical summer trading range. They are all averaged together in the red line, distilling down gold’s core seasonal tendencies. Then superimposed over the top of all that in blue is gold’s current price action in 2018. After a typical summer start, gold took a sharp turn for the worse. Market summers deviate from true orbital summers, running June, July, and August proper. Traders likely think this way because of the major vacation weekends bracketing these summer months in the US. So gold’s last close in May is the entry point off which summer price action is measured. That’s recast at 100 in this chart to keep all modern bull-market years’ price action perfectly comparable in percentage terms. On average between 2001 to 2012 and 2016 to 2017, from late May to mid-June gold slumped 1.0% to its major seasonal summer-doldrums low. From there gold tended to start recovering, leaving June with modest average losses of 0.2%. This first-half-of-summer weakness usually passes by mid-July, so that month saw solid average gains of 0.9%. Those are driven by gold’s major autumn rally getting underway. As that gathers steam with investors refocusing on markets following vacations, August actually averaged hefty 2.2% gold gains! So technically the summer doldrums encompass the first 5 to 6 weeks of market summers, all of June and early July. Thus we ought to be through the worst of gold’s seasonal weakness this summer. That’s even more likely considering how much gold fell below its early-summer mean so far in 2018. Gold actually proved relatively strong early on, rallying 0.3% month-to-date by June’s 10th trading day which is gold’s major seasonal low. That was all the more remarkable considering it came the day after a major Fed decision. The Federal Open Market Committee not only hiked its federal-funds rate for the 7th time in this cycle, but upped its forecast for future rate hikes. Such hawkishness has hammered gold in the past. Gold-futures speculators dominate gold’s near-term price action, especially when investors are missing in action like during market summers. Gold futures allow insane extreme leverage. Back on June 14th when gold hit $1302, a single gold-futures contract controlling 100 troy ounces was worth $130,200. Yet traders were only required to maintain cash margin balances of $3100 per contract, which is next to nothing. Thus gold-futures speculators were able to run maximum leverage up to 42.0x! Even this week following gold’s sharp selloff since, 40.4x is still possible. That gives fully-margined gold-futures speculators 40x the price impact on gold as an investor buying outright! So $1 of margin supporting gold-futures selling hits gold as hard as $40 of investment selling. That gives futures traders outsized influence over gold’s price. Running such extreme leverage is hyper-risky, as a mere 2.5% gold-price move against traders’ positions would wipe out 100% of their capital risked. Thus these gold-futures speculators are naturally forced to have an ultra-short-term focus. Fundamentals are meaningless to them, all they care about is what gold is likely to do over the coming hours and days. They can’t afford to be wrong for long at extreme 40x leverage! So gold-futures speculators are obsessed with anything that can quickly move gold. Topping that list are Fed actions, the US dollar’s fortunes, and major US economic reports like today’s monthly jobs number. Often all three of these are interrelated. The dollar is more likely to be bid higher on a hawkish Fed, and the Fed is more likely to hike rates if economic data is strong. So these things can really bully gold around. At every other FOMC meeting, top Fed officials’ individual federal-funds-rate outlooks are summarized on a table traders call the dot plot. Released quarterly, this can really unleash gold-futures trading moving gold fast. If the dot plot is more hawkish than expected, indicating more near-term rate hikes likely, gold often gets sold hard. The Fed’s 2nd rate hike of this cycle in mid-December 2016 set recent years’ precedent. That day the FOMC’s latest dot plot went from implying 2 more rate hikes in 2017 to 3. Despite history proving the opposite, gold-futures speculators believe higher interest rates are bearish for gold. So they aggressively dumped gold futures, hammering gold 1.4% lower that day and 1.2% the next. And after other FOMC meetings accompanied by more-dovish-than-expected dot plots, gold has been strongly bid higher. So when that newest dot plot last month came in hawkish, there were high odds gold would suffer a sharp selloff. Especially in the dark heart of the summer doldrums, when investors aren’t around to moderate or overpower speculators’ gold-futures trading. On June’s latest Fed Day, top FOMC officials’ collective rate-hike outlook climbed from 3 total hikes in 2018 to 4. That should’ve unleashed serious gold-futures selling. But amazingly it didn’t, gold rallied 0.3% on the 13th despite this latest hawkish dot plot. And even more remarkable was its 0.2% gain the next day to $1302. That morning the European Central Bank made a major policy announcement. It declared it was ending its enormous quantitative-easing campaign at the end of 2018, but tried to mollify currency traders by promising it wouldn’t hike rates before next summer.