What Rules Apply in the Gold Market These Days?

• Gold markets, both cash and futures, continue to find buying interest despite being priced at all-time highs.
• Recent CFTC Commitments of Traders reports have shown noncommercial interests decreasing their net-long futures position in gold futures. 
• This puts the spotlight on investors using gold markets as a hedge against expected Chaos while waiting on the next US presidential election. 

My friend Neils Chistensen, Editor at Kitco News, posed a question to me on social media Wednesdy afternoon, “Which Newsom Market Rule best describe gold? It is just unstoppable.” A little background: I’ve talked to Neils (as well as Kitco’s Ernest Hoffman) for years. Neils would call when he wanted a different take on the gold market, economics, or the world situation than what most of the clones in the analysis/commentary industry would give. Over the years, I would sprinkle in not only my 7 Market Rules, but also some of the other ideas I hold about market behavior (e.g. The Goldilocks Principle[i], The Benjamin Franklin Fish Analogy[ii], etc.). In this case, though, Neils was curious about my Rules. In my reply, three of them came to mind. 

Rule #1: Don’t get crossway with the trend. When I talk about trend, it’s a simple reading of price direction over time. A look at the monthly chart for the cash gold index (GCY00) shows the market has extended its major (long-term) uptrend to a high of $2,688.34 this month before settling Wednesday at $2,673.68. As Neils pointed out, the market has been unstoppable as it continues to find buying interest despite sitting at or near all-time highs. Another way to think about Rule #1 and cash gold, it doesn’t tend to end well when one steps in front of a runaway train. 

Rule #4A: A market that can’t go down won’t go down. This is where gold starts to get interesting. Having established the fact gold continues to move higher, based on the general assumption of an inverse relationship between gold and the US dollar, the conclusion would be the greenback has continued to weaken. This also makes sense given the US Federal Open Market Committee cut the Fed fund rate by 25-basis points at the conclusion of its September meeting with another cut expected in early November. Keep in mind the next FOMC meeting concludes on Thursday, November 7, two days after the next US presidential election (this is important). With all these fundamental factors, for lack of a better term, telling us the US dollar should be weakening and gold strengthening, it’s interesting to see gold continue to press onward and upward despite the stronger US dollar. The follow-up question to this analysis is almost always, “But why?”

Rule #5: It’s the what, not the why. Going back to the stock market crash of 1987[iii], I’ve spent my career studying WHAT makes markets behave the way they do. When it comes to WHY, it can be any of thousands of reasons at any given time. There is potentially as many reasons why as number of trading interests in a given market, which is why the BRACE[iv] Community tends to make up reasons a market did what it did that day. But when we analyze the what, things get far more interesting. 

Recall from previous discussions my Rule #1 is based on Newton’s First Law of Motion applied to markets: A trending market will stay in that trend until acted upon by an outside force. Usually, that outside force is investment money. However, if we look at recent CFTC Commitments of Traders reports[v] we see funds have been liquidating some of their net-long futures position in gold (GCZ24). As of Tuesday, September 24, Watson[vi] held a net-long futures position of 315,390 contracts, its largest net-long futures position since the week of March 3, 2020 (319,733 contracts). The latest position consisted of: 

• 387,572 contracts of long futures (the most since 389,339 contracts on February 25, 2020)
• 72,182 contracts of short futures

The next week, Tuesday, October 1, showed the noncommercial net-long futures position had been trimmed to 299,930 contacts. This was a result of 

• A decrease in long futures by 17,520 contracts and 
• A decrease in short futures by 2,060 contracts

The following week, Tuesday, October 8, showed more of the same as the noncommercial net-long futures position came in at 278,180 contracts. This was a decrease of another 21,750 contracts created with:

• A decrease in long futures by 21,160 contracts and 
• An increase in short futures of 590 contracts

The question now becomes, if Watson is selling, who is buying? What do we know about gold? It is a safe haven market against global chaos, and as the US creeps closer to its next presidential election the general consensus is that global players needing[vii] to create political change in the United States will get more desperate. We’ve seen private meetings between the leaders of China and Russia, followed immediately by the latter’s invasion of Ukraine and the former’s saber rattling over Taiwan. OPEC-plus then followed with crude oil production cuts. When none of this failed to create global economic collapse, China and Russia turned to their satellite countries and alliances (e.g. Syria, Iran, and most recently North Korea) to up the ante with violence. 

Long-term investors like a good return, and global stock markets continue to move higher on the improved economic situation over the past few years. However, those same investors don’t like uncertainty, and the growing reality of increased Chaos ramps up the uncertainty factor heading into each weekend. With all this in mind, my answer to who continues to buy gold is still investors, but in the role of hedging other investments rather than taking long positions in futures. This could be in the form of cash gold holdings, or the equivalent of the same through ETFs, etc. (and yes, even option positions). It’s interesting to note how the price difference between the cash index and December futures (basis) has narrowed the closer we get to the election, again indicating investors are buying the cash market.

[i] Daily charts are too hot, monthly charts are too cold, but weekly charts are just right. 

[ii] Like guests and fish, markets start to stink after three days/weeks/months (whatever time frame is being studied) of moving against the trend. 

[iii] It’s hard to believe we are coming up on the 40-year anniversary of Black Monday. The 37-year mark is Saturday, October 19, 2024. 

[iv] The group of Brokers/Reporters/Analysts/Commentators/Economists who are the industry’s equivalent of ambulance chasers.  

[v] As always, I’m talking about the weekly legacy/futures only reports. Again, the BRACE Community refuses to understand options traders trade options for a number of reasons other than being bullish, bearish, or neutral a market. 

[vi] My name for the algorithm-driven investment industry in general.

[vii] Note I didn’t say “wanting”.

More Metals News from Barchart

• Dollar Moves Higher on US Economic Strength and Euro Weakness
• Stocks Rally on Solid US Economic News and Chip Stock Strength
• Dollar Rallies as the British Pound and Euro Slide
• Stocks Mostly Higher on Strong Corporate Earnings Results

On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.