from Silver Doctors:

As strong investment demand continues pushing gold higher on balance, sooner or later the gold-futures speculators will join in to ride this upleg…

by Adam Hamilton of Zeal LLC

Gold’s powerful post-stock-panic upleg hasn’t enjoyed buying support from the gold-futures speculators.  These influential traders often drive and even dominate major gold-price trends.  But they’ve been subtly selling into gold’s sharp recent rally.  Their dogged skepticism is actually very bullish for gold in coming months.  Gold-futures speculators are amassing big gold-futures-buying firepower that will be unleashed.

The maelstrom of extreme fear spawned by mid-March’s stock panic even briefly sucked in gold.  It had surged to a 7.1-year secular high of $1675 during the initial weeks of that heavy stock-market selling.  But once that went panic-grade, which is major stock indexes plummeting 20%+ in 2 weeks or less, even gold was dumped in the frantic dash for cash.  Similar to prior panics, gold plunged 12.1% in just 8 trading days.

But that sharp emotional drop was wildly-unjustified fundamentally.  With stock markets burning and the Fed printing crazy-record sums of new money like there’s no tomorrow, gold should’ve been soaring.  So it rapidly V-bounced out of that anomalous stock-panic low, to blast much higher over the next couple months.  Between mid-March to late May, gold surged up 18.7% to a 7.5-year secular high near $1748.

Surprisingly the gold-futures speculators didn’t participate in that at all!  Usually it’s their buying that births major gold uplegs, first short covering and later adding new long positions.  Over a few months or so that drives gold high enough fast enough to convince investors to start returning.  Gold-futures buying acts like the starter that gets the far-larger gold-investment-buying engine running.  But specs have been missing in action.

Gold-futures speculators wield a majorly-outsized impact on gold prices, so their trading is very important to watch.  That comes from a couple unique attributes of the gold-futures market.  First it allows extreme leverage vastly larger than any other gold market, amplifying the gold-price impact of gold-futures trading.  Second, the resulting gold-futures price is gold’s world reference one that has universal psychological influence.

Since the mid-1970s, the legal limit of leverage in the stock markets has been 2.0x.  Stock traders can only use 50% margin at most.  Futures trading allows radically more.  As of the middle of this week, each gold-futures contract controlling 100 ounces of gold only required specs keep a maintenance margin of $9,150 cash in their accounts.  Yet at $1725 gold, each 100-ounce contract controls $172,500 worth of this metal.

That makes for extreme maximum leverage of 18.9x!  Amazingly that’s actually really low for gold futures.  My last essay on this topic in late February warned about gold’s peculiar surge that was looking toppy at the time.  At that point maintenance-margin requirements were much lower so the maximum leverage that gold-futures speculators could run was 32.0x.  That’s way closer to historical norms than today’s levels.

Nevertheless even at 19x, every dollar gold-futures speculators deploy has 19x the gold-price impact of a dollar invested outright!  That extreme leverage is certainly risky, as a mere 5.3% adverse move against specs’ positions would wipe out 100% of their capital deployed.  Cash margins were likely raised because gold-futures prices were disconnecting from physical gold prices in the weeks after mid-March’s stock panic.

At one point in late March, gold-futures prices were $105 per ounce over spot prices!  That appeared to be mostly a COVID-19 thing.  Just across the border from hard-hit northern Italy, in Switzerland 3 of the world’s largest gold refiners suspended operations.  Air travel to move gold bullion around was heavily restricted too.  Those disruptions seriously decoupled gold-futures prices from the underlying physical market.

Read More @ SilverDoctors.com