The notorious gold futures speculators just struck again, selling aggressively and pummeling gold sharply lower. Another red-hot inflation report goaded them into puking out more contracts, which is supremely irrational given market history. But their heavy selling since mid-April has exhausted their finite capital firepower. So that gold-distorting spewing is stalling out, and will soon reverse to huge mean-reversion buying.
The latest US Consumer Price Index inflation report was released this Thursday, again coming in hotter than expected. The headline print surged 8.2% year-over-year, off its +9.1% peak in June but ahead of economists’ +8.1% expectations. And the core number excluding food and energy soared 6.6% YoY, its biggest gain since August 1982! Inflation continues to rage out of control thanks to extreme Fed money printing.
For centuries if not millennia, gold has proven the ultimate inflation hedge. As its global mined supply can only increase slowly on the order of 1% annually, it has always been the go-to investment during times of currency debasement. Serious inflation rapidly erodes purchasing power, punishing investors with big real losses. With the worst inflation super-spike since the 1970s plaguing us, gold truly should be soaring.
That decade saw two similar inflation super-spikes where gold skyrocketed. In the first the CPI blasted from +2.7% YoY to +12.3% over 30 months into December 1974. Gold’s monthly-average prices from trough to peak CPI months launched 196.6% higher! During the second the CPI exploded from +4.9% YoY to +14.8% in 40 months climaxing in March 1980. Gold’s monthly-average prices were a moonshot, up 322.4%!
Yet immediately after this latest red-hot September CPI data, gold collapsed 2.0% within an hour. And that insane dissonant behavior is par for the course this year. Between mid-April to late September, gold collapsed 17.9% to levels not seen since just after March 2020’s pandemic-lockdown stock panic! During that span, monthly headline CPI inflation ran a scary +8.3%, +8.6%, +9.1%, +8.5%, +8.3%, and +8.2% YoY.
And real-world inflation is way worse, probably at least double the intentionally-lowballed CPI. What kind of traders see red-hot inflation data and experience even faster-rising prices in their own lives, then think they should dump gold? Those infuriating, hyper-leveraged, ultra-myopic gold futures speculators! While they have managed to temporarily distort gold prices this year, they will be wiped out as it quickly normalizes.
Unfortunately these guys punch way above their weights in bullying around gold prices because of the extreme leverage inherent in gold futures trading. With gold around $1,675 midweek before their latest incoherent puking, each 100-ounce contract controlled $167,500 worth of gold. But traders are merely required to keep cash margins in their accounts of $5,700 per contract, enabling maximum leverage up to 29.4x!
Running at that current 29x limit, each dollar gold futures speculators trade has 29x the gold-price impact of a dollar invested outright! But that is exceedingly risky, with these traders facing 100% losses if gold merely moves 3.4% against their bets. That forces these guys to have ultra-short-term focuses, trading on time horizons measured in hours or days. So economic data surprises moving markets is a big deal to them.
They’ve been relentlessly puking out heavy-to-extreme amounts of gold futures long and short contracts since mid-April. Nearly all their big selling days happened after important economic data, top Fed officials talking hawkish, and Federal Open Market Committee meetings executing monster rate hikes along with quantitative-tightening monetary destruction. All this has catapulted the US dollar into a parabolic mania.
During mid-2022’s 5.5-month span where gold inexplicably defied all history by plunging 17.9% with an inflation super-spike raging, the benchmark US Dollar Index skyrocketed 14.2% higher! That proved a stupendous rally for a major world currency, off-the-charts extreme. gold futures speculators watch the US dollar’s fortunes for their primary trading cues, then do the opposite when the dollar materially moves.
Their epic puking done with extreme leverage has massively distorted gold prices. They are radically too low given this inflation-super-spike backdrop. The false price signals sent by all that gold futures dumping have severely impaired gold psychology. As gold was pummeled ever lower, investors have increasingly fled assuming the yellow metal is broken or no longer an inflation hedge. This has been utterly maddening.
In coming years, traders will look back on mid-2022 and marvel that anyone believed panic-level gold prices were righteous with inflation raging out of control. Sooner or later gold will normalize to reflect the vastly-expanded money supplies around the world. In just 25.5 months into mid-April 2022, the Fed more than doubled the US-dollar monetary base by ballooning its balance sheet a dumbfounding 115.6% higher!
The silver lining on these farcical gold prices is gold futures speculators’ capital firepower available for selling is quite finite. They can only dump so many long contracts, and pile into so many short ones, before their funds are exhausted. Those limits are very close today, where selling has to stall out. After that these traders are forced to do massive symmetrical mean-reversion buying, which catapults gold far higher.
This chart mostly explains why gold prices are languishing so anomalously low despite this super-bullish inflation-super-spike backdrop. It superimposes gold prices over speculators’ total gold futures long and short contracts as reported weekly in the famous Commitments-of-Traders reports. Specs have puked out enormous amounts of gold futures, which has left their positioning unsustainably exceedingly bearish.
The lion’s share of gold’s absurd 2022 plunge indeed came since the US dollar started shooting parabolic in mid-April, on the Fed’s most-extreme hawkish pivot ever. But gold’s selloff was born before that in early March, from really-overbought levels at $2,051 driven by the sharp geopolitical spike after Russia invaded Ukraine. From there, gold has actually dropped 20.9% which is technically new-bear-market territory.
The gold futures selling during that 6.6-month span has been enormous beyond belief. That weekly CoT data on spec gold futures positioning is current to Tuesdays. Between the ones matching gold’s early-March high and late-September low, speculators dumped an astounding 165.5k long contracts while short selling another 66.0k! That adds up to 231.5k of puking, which is the equivalent of 720.1 metric tons of gold!
That gold futures spewing was even worse from a couple weeks around this gold-selloff span. Specs’ total longs actually plummeted 173.1k contracts at most, while their shorts rocketed 94.6k. That adds up to 267.7k, or 832.7t in gold-equivalent terms! Even March 2020, when gold collapsed 12.1% in just eight trading days on stock-panic safe-haven dollar buying, only saw speculators sell 49.3k gold futures contracts.
So this past half-year’s 250k-ish of dumping was astonishing. Gold actually proved resilient only falling 20%-ish in the face of such colossal withering selling pressure. And those artificially-depressed gold prices from this extreme gold futures puking really depressed investors, who increasingly fled in response to these false price signals. That was seen in the best high-resolution proxy for global gold investment demand.
That is the combined gold-bullion holdings of the mighty world-dominating GLD SPDR Gold Shares (GLD) and IAU iShares Gold Trust (IAU) gold exchange-traded funds. Reported daily, their holdings’ quarterly changes often account for a large majority of overall global gold investment demand trends reported by the World Gold Council. During that 6.6-month gold plunge, GLD+IAU holdings fell 9.0% adding another 140.9t of selling.
But that proved considerably worse expanded a bit around gold’s geopolitical-spike topping and recent panic-grade low. Investment capital flows tend to lag gold price trends, because investors don’t need to scrutinize gold like the futures speculators. With no leverage, their risks are radically lower. From mid-April to late September, GLD+IAU holdings actually plunged 12.7% or 207.2t at worst as investors fled gold.
So the identifiable gold selling in this past half-year from gold futures trading and those mighty American gold ETFs alone totaled a mind-boggling 1,039.9t! For an idea of how ludicrously outsized that is, during all of 2021 total global investment demand per the WGC ran 1,007.4t. So mid-2022’s epic gold selling, which was 4/5ths gold futures puking, exceeded all the prior year’s investment buying in about half the time!
This extreme anomaly isn’t sustainable, and will soon proportionally reverse catapulting gold way higher. One of the biggest mistakes traders make is assuming current market conditions will continue indefinitely, extrapolating the present into the future. That always proves wrong, as markets are forever cyclical. When 2022 dawned, traders figured the record-high US stock markets would keep powering higher this year.
Yet as of midweek, the flagship S&P 500 stock index has plunged 25.4% since then in a mounting bear! Back in mid-2020 soon after the Fed started redlining its monetary printing presses to flood the world with dollars, traders assumed that wouldn’t be inflationary. Yet even the politically-manipulated headline CPI has soared from +1.0% YoY then to +9.1% this past summer. Once markets hit extremes, they mean revert.
Today’s universal assumptions that gold is no longer an inflation hedge so it is doomed to keep grinding lower are just as wrong. Markets are like rubber bands, they can only be stretched so far…
Read More: Gold Futures Puking Stalling