Gold: Nearly half of trend-followers’ positions to be liquidated – TDS

For the first time in months, CTAs could begin to sell off Gold in a downtrend over the next week, reinforcing the scenario for our tactical short. Alternative views on the positioning scenario see Western money managers potentially continuing to increase their length, underlined by a direct reading of CFTC positioning data suggesting speculator positioning is only slightly frothy and well below its all-time high, notes TDS commodity analyst Daniel Ghali.

Possible CTA sales activity to begin during the next week

“Our advanced positioning analytics, however, provide an edge on this reading. Our point of contention: taking into account the leverage environment suggests that it is effectively already at its maximum. Positioning of CTAs and risk parity portfolios is constrained by the leverage environment, which explains why we believe the CFTC data has effectively already reached a local top, albeit remaining below its all-time high.”

“Macro funds’ positioning is also effectively at its maximum. This positioning remains statistically consistent with over 400 basis points of Fed cuts over the next year, and is at levels that marked local highs in several previous cycles, followed by declines in the 7%-10% range.”

“With multiple clusters simultaneously vulnerable, a continued downtrend in gold may finally begin to catalyze CTA selling activity over the coming week, reinforcing our view that the first cluster to flash may trigger subsequent selling activity. All told, we estimate that nearly half of trend-followers’ positions will be liquidated on a retracement toward $2,400/oz. Downside risks now look more potent.”