The recent surge in gold prices, which has reached new all-time highs, may have been influenced by a “stop hunt” maneuver, according to Daniel Ghali, Senior Commodity Strategist at TD Securities. This term refers to a market strategy where prices are driven to new highs or lows to trigger stop-loss orders, leading to increased volatility and potential reversals.
Evidence of Stop Hunt and Market Positioning
Ghali suggests that the timing of the gold rally—coinciding with a surge to new highs—appears suspicious and could indicate that the move was engineered to trigger stop-loss orders from those who had short positions. This is supported by data showing increased short positions by proprietary traders, family offices, and macro funds while gold prices were near their peaks.
The balance of risks is now perceived to be skewed significantly to the downside. Historically, similar macro fund positioning levels have preceded local tops in gold prices, including during notable periods such as:
- July 2016: Around the Brexit referendum
- September 2019: Following “stealth QE” by central banks
- March 2020: During the early stages of the pandemic
Additionally, traders in Shanghai are reported to be holding record-long positions in gold, while Commodity Trading Advisors (CTAs) are already at maximum long positions. This widespread bullish sentiment adds to the potential for a significant price correction if the market shifts.
Fed’s Rate Cut Expectations and Market Dynamics
With nearly 120 basis points of rate cuts already priced into the market for the remainder of the year, and a rapid move towards a “neutral” interest rate expected into the New Year, the current “Goldilocks” pricing for gold could be challenged if these expectations are not met or if economic conditions shift unexpectedly.
Labor Market Weakness and Gold Prices
The current labor market weakness is influencing market convictions. Historically, labor market weakness has often led to further economic decline. However, this cycle has not yet seen the significant layoffs typically associated with labor market downturns, leaving some uncertainty about whether the current situation will follow past patterns.
Summary
In summary, while gold prices have recently hit record highs, there are signs that this rally may have been driven by a stop hunt. Current macro fund positioning, alongside record-long positions from other market participants, suggests a potential for a downside correction. The balance of risks is skewed, and the gold market‘s reaction to upcoming economic developments and Federal Reserve decisions will be crucial in determining its future trajectory.
