The markets are currently pricing in a 50 basis point or 25 basis point cut by the US Federal Reserve (Fed), with more than 175 basis points of cuts expected by March. This has resulted in a surge in positions being taken in Gold, with TDS Senior Commodity Strategist Daniel Ghali noting that the tepid reaction to the US Nonfarm Payrolls data can be attributed to this.
Gold prices have remained near all-time highs as a result of the massive positions taken by macro funds. Ghali points out that the extreme positioning from this cohort has historically marked notable local highs in Gold prices, followed by subsequent drawdowns ranging from 7% to 10%. This suggests that a correction in Gold prices may be on the horizon.
While a significant beat on the Nonfarm Payrolls data could have pushed for a reevaluation of expectations, it is not necessary for Gold prices to decline. As price action becomes increasingly lackluster, the bar for CTAs to sell is lowering, potentially leading to selling activity from trend followers. This, despite the fact that Gold prices are still near their all-time highs.
It is important to note that the current levels of macro fund positioning in Gold have only been matched by events such as the Brexit referendum in 2016, the ‘stealth QE’ narrative in 2019, and the peak panic of the Covid-19 crisis in March 2020. These extreme positions have historically led to significant drawdowns in Gold prices, suggesting a potential correction in the near future.
Given the current market conditions and the high levels of positions in Gold, investors should be cautious about a potential downturn in prices. A notable beat on the Nonfarm Payrolls data could trigger a repricing in expectations, leading to a sell-off in Gold. While Gold prices remain near all-time highs, the possibility of a correction should not be overlooked.
In conclusion, the surge in positions in Gold, driven by expectations of cuts by the US Federal Reserve, has led to near all-time highs in Gold prices. However, extreme positioning by macro funds historically precedes notable drawdowns in Gold prices. Investors should exercise caution in the current market environment, as a significant beat on the Nonfarm Payrolls data could trigger a sell-off in Gold, despite its high price levels.
