• After posting a high daily close of $2,800 on October 30, the December gold futures contract has come under heavy pressure.

• Open interest has dropped along with price, indicating selling is coming from investors on both the investment and hedge fronts. 

• However, the long-term implications of the 2024 US presidential election could bring buyers back to the safe-haven gold market once the short-term downtrend has played out. 

December Gold was under pressure again overnight through early Tuesday morning, dropping as much as $22.00 (0.8%). As of this writing the contract had trimmed its loss to $6.00, sitting at $2,611.70. There is a lot going on in the gold market these days, though I don’t think the market is as bearish as many others are saying. As I did in my discussion of the November US Federal Open Market Committee meeting, I’ll paraphrase Mark Twain in today’s discussion of gold, “The report of its (the gold market’s) death was an exaggeration”. 

From a technical point of view, December gold (GCZ24) simply looks to be finishing the minor (short-term) downtrend on its daily chart. Recall the contract had been pushed higher for months due to the uncertainty of the US presidential election and expected Chaos from key global players in an attempt to influence the election’s outcome. Long-term investment traders were buying gold as a hedge against investments in sectors across the board, most notably equities. With the uncertainty of the election now behind us, and conciliatory behavior toward those same global players on the horizon with the new US administration once the calendar page turns to 2025, long hedgers have lifted some of those positions.

It’s interesting to note total open interest (purple line, bottom study) peaked on October 30 at 584,500 contracts, the same day Dec gold posted its high daily close of $2,800.80. Monday evening’s total open interest calculation came in at 540,000 as the contract closed at $2,617.70.

The latest CFTC Commitments of Traders report (and yes, I’m talking about the legacy, futures only edition) showed Watson (my name for algorithm-driven investment trade in general) decreased its net-long futures position by 23,324 contracts the week ending Tuesday, November 5 (election day, coincidentally). The net-long futures position of 255,329 contracts was also down 60,000 contracts from its recent high of 315,390 contracts the week of Tuesday, September 24. Heading into the last positioning day of the week for Watson, Dec gold is down about $135 since last Tuesday’s close indicating funds have continued to sell this past week. We’ll find out how much with this coming Friday’s Commitments of Traders update. 

All that being said, the contract could be looking at a bullish turn in the not-too-distant future. Daily stochastics (a momentum indicator) have dropped below the oversold level of 20%, in position for a bullish crossover that would signal a move to a new minor uptrend. Additionally, implied volatility has dropped to near 14%, an invitation for option traders to possibly get more involved in the market as well. However, as we should all know by now, those who trade options professionally do so for reasons other than markets looking bullish, bearish, or otherwise. They use the Greeks associated with options, in a variety of combinations, looking for the opportunity to take advantage of the rest of the traders in a market[i]. As I’ve long said, options traders are playing Bridge while the rest of us play Go Fish. 

Further out, the intermediate-term trend on Dec gold’s weekly chart also looks to have turned down. This is again due to pressure from investors, both on the investment side and hedge side. However, the S&P 500 index is still showing a long-term bearish reversal completed at the end of October, regardless of the move to a new all-time high in early November. This means that once the euphoria/hysteria of the US election wears off, markets may return to previous patterns. With that in mind, the long-term trend of the Cash Gold Index (GCY00) was still up at the end of October, though is also facing a potential bearish reversal by the end of November. 

Let’s briefly discuss what is being called the “Trump Trade”. This past week has seen advocates claim the extended rally by US stocks, strength of the US dollar, weakness of US Treasuries, and selloff in gold are all due to the results of last Tuesday’s election. They are correct, for the most part, as the knee-jerk reaction and ripple effects continue to be seen across market sectors. But are these moves sustainable long-term given what we know about the president-elect?

• Once the next US inauguration occurs, look for OPEC+ to announce the end of production cuts.
  • Likely coinciding with the second official act of the new administration to lift sanctions against Russia.
• Recall the president-elect is a fan of a weak dollar and low, if not negative, interest rates. This could make it difficult for the US dollar index to maintain its recent strength.
• Additionally, it would not be surprising to see China make a move toward taking Taiwan over the coming months.
  • This could collapse the Nasdaq ($NASX), which would then be expected to pull down the S&P 500 Index (($INX).

This scenario paints the picture of more Chaos and uncertainty over the coming years, meaning hedgers and investors could (should?) return to the gold market long-term. We also need to keep an eye on Dr. Copper (HGY00) the global economic indicator, as it continues to come under post-election pressure. But that’s a subject for another day. 
 

[i] This is why it is misleading, and silly, for the bulk of the industry that talks about such things to continue to quote CFTC Disaggregated Futures and Options numbers. I still say it’s just because folks think they sound smart by saying “disaggregated”.

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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.