The [gold] ship is crowded. Do you have a slot secured on the lifeboat?’ – TD Securities’ Ghali

The long gold trade is more crowded than ever, and despite the strong macro environment and imminent Fed rate cuts, the risk of a significant price pullback is growing by the day, according to TD Securities’ Senior Commodity Strategist Daniel Ghali.

In a research note published Monday, Ghali said that even though the Federal Reserve is almost certain to cut its benchmark interest rate at the upcoming September meeting, the chances of a correction in the gold market are increasing every day.

“Our gauge of macro fund positioning in Gold is now at the highest levels recorded in the depths of the pandemic,” he wrote, adding that market positioning has reached “the local highs set in Sep 2019, and previously in Jul 2016. Symmetrically, extreme short positioning from this cohort marked the lows in 2018 and 2022,” he noted.

“This time around, CTAs are also max long and Shanghai traders' net length has also inched towards record highs,” he said. “Algos are also vulnerable in silver, with most scenarios for prices pointing to selling activity on the horizon, barring a break north of $31.5/oz.”

Ghali said the current setup is “the antithesis to the early-year dichotomy in positioning that helped to propel Gold on its trajectory towards current all-time highs.”

“Downside risks are now more potent,” he added. “The ship is crowded. In fact, it has scarcely been as crowded as it is today. Do you have a slot secured on the lifeboat?”

In a follow-up note published Tuesday, Ghali characterized gold markets as “unanimously bullish” with visible short positions hovering near ten-year lows, driven by high deficits, slowing growth, sticky inflation, currency devaluation, and the imminent start of theFed’s rate-cutting cycle.

Reiterating that macro fund positioning has reached the heights seen during the worst days of the Covid-19 pandemic, he observed that “It is more statistically consistent with deep recession cuts than it is with normalization cuts, or alternatively may be bloated due to geopolitics, deficits, or any number of the bullish narratives touted above.”

“What is clear is that macro funds have scarcely held more Gold than they do today,” Ghali said. “CTAs are also effectively 'max long.' Chinese ETF outflows have resumed. Shanghai trader positioning near record-highs already reflects Gold’s allure in the face of a weaker domestic currency, stock and property market.”

Despite all the economic headwinds facing Chinese investors, “Asia is on a buyer's strike in physical,” he noted. “Visible short positions remain near decade-lows. Narratives in Gold markets are unanimously bullish. We see significant risks to the near-term outlook tied to positioning, despite the strong fundamental backdrop.”

After setting fresh all-time highs last week, gold prices have since pulled back somewhat, with spot gold twice dipping below $2,500 per ounce during Wednesday’s session. Spot gold last traded at $2,507.60 per ounce for a loss of 0.68% on the daily chart.t

Ernest Hoffman

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Tim Moseley