zealllc.com / Adam Hamilton / October 7, 2016
Gold, silver, and their miners’ stocks plummeted out of the blue this week, shattering their bull-market uptrends. Gold-futures speculators had been holding excessive long positions for months, weathering all kinds of selling catalysts. But once gold slipped through key support, long-side futures stop losses started to trigger unleashing cascading selling. Understanding this event and its implications is crucial for traders.
This week’s precious-metals carnage was a big surprise, erupting suddenly with no technical warning. Gold had been faring quite well after hitting its latest interim high of $1365 in early July. That was driven by heavy fund buying of gold-ETF shares in the wake of late June’s unexpected pro-Brexit vote. After those big capital inflows dried up, gold consolidated high. At worst by late August it had pulled back 4.1% to $1308.
Then gold spent all of September grinding higher along its bull-market uptrend’s support, which was an impressive show of strength. Speculators were holding large near-record long positions in gold futures. Since these bets are so hyper-leveraged, that greatly elevated the risks of a snowballing selloff. I wrote extensively about gold’s record selling overhang back in mid-July, and that threat has lingered ever since.
But despite all kinds of excuses to do so, the futures speculators never rushed for the exits. Every week their collective bets on gold are detailed in the CFTC’s famous Commitments of Traders reports. Back in late June, speculators’ gold-futures long contracts climbed above 400k for the first time in history. Then a couple weeks later in early July, they climbed to an all-time record high of 440.4k contracts as gold peaked.