Speculators Missing in Action Amid Gold's Volatility

Gold has been experiencing unusually high volatility since early June, resulting in considerable technical damage and bearish sentiment. Despite this volatility, speculators' gold-futures positioning hasn't reflected it, with traders seemingly missing in action.

American gold-futures speculators normally dominate short-term gold fortunes due to their use of hyper-leveraged trading vehicles like COMEX gold futures. Each contract controls 100 troy ounces of gold worth $413,550 midweek, but requires only $20,735 cash in margin accounts for each contract traded. This enables extreme maximum leverage to gold of 19.9x.

This leverage amplifies the price impact of speculators' buying and selling on gold prices. When specs buy and sell futures in size, it can cause sharp price movements. The resulting US gold-futures price also serves as a world reference for gold prices.

Historically, big CoT-week gold moves have been explainable by parallel spec gold-futures trading. However, this strong relationship has broken down recently, particularly in the past six weeks. Spec gold-futures trading hasn't reflected recent large daily gold price movements, which are usually fueled by hyper-leveraged trading.

In June and July, several significant events triggered sharp gold price moves, but speculators' positions didn't reflect these events. For example, after a big upside surprise in US jobs boosted Fed-rate-hike odds, gold plummeted 3.7% on June 5th, with specs selling only 5.3k contracts or 16.5t of gold.