Gold does not hedge against deleveraging or liquidity dynamics. There’s an acute risk of a widespread deleveraging event that could counterintuitively weigh on Gold prices. Markets suspect that recent selling activity has still been limited to the implications of unwinding carry trades, TDS senior commodity strategist Daniel Ghali notes.
Large-scale selling activity to kick off below $2390
“The recent price action following a considerable miss on payrolls data, alongside a meltdown in rates and into a weekend which hosted substantial geopolitical risks tied to the conflict in the Middle East are telling: not only is macro fund positioning bloated, but it is fully tapped out for the time being.”
“Commodity Trading Advisor (CTA) trend followers still hold substantial dry-powder to sell, with large-scale selling activity likely to kick off below $2390/oz in active futures. Shanghai traders still hold near-record length in Gold as a currency-depreciation hedge, but the driver of this build-up in positioning has significantly deteriorated with Asian currencies notably strengthening.”
“De-escalation in the Middle East could exacerbate these flows as safe-haven flows are simultaneously unwound. Overall, this suggests that the implications of a deleveraging event could be significant in Gold markets, which places our attention on a potential bounce in yields as a possible catalyst for large-scale mechanical selling activity from risk parity and vol-control funds, CTAs, macro funds and Shanghai traders.”
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