The gold market is becoming increasingly crowded, raising the risk of a significant price pullback even as the macroeconomic environment and imminent Federal Reserve rate cuts remain favorable, according to TD Securities’ Senior Commodity Strategist Daniel Ghali.
In a research note released Monday, Ghali highlighted that despite the near-certainty of a Fed rate cut in September, the likelihood of a gold market correction is mounting daily.
“Our measure of macro fund positioning in gold has now reached its highest level since the depths of the pandemic,” Ghali noted, pointing out that current market positioning mirrors the peaks seen in September 2019 and July 2016. Conversely, extreme short positions from this group marked market lows in 2018 and 2022.
Ghali emphasized that Commodity Trading Advisors (CTAs) are also heavily invested in long positions, and Shanghai traders have similarly approached record-high net lengths. He warned that silver markets are also vulnerable, with most price scenarios suggesting impending selling pressure unless prices break above $31.5 per ounce.
The current market setup, according to Ghali, starkly contrasts with the early-year divergence in positioning that fueled gold’s rise to its current record highs. “Downside risks are now more pronounced,” he cautioned. “The market is extremely crowded—perhaps more than ever before. Do you have a spot on the lifeboat?”
In a follow-up note on Tuesday, Ghali described gold markets as “unanimously bullish,” with short positions hovering near decade lows. He attributed this to high deficits, slowing economic growth, persistent inflation, currency devaluation, and the anticipated start of the Fed’s rate-cutting cycle.
He reiterated that macro fund positioning is at levels reminiscent of the worst days of the COVID-19 pandemic, noting that this positioning seems more aligned with expectations of deep recession-driven rate cuts rather than normalization. It may also be inflated by geopolitical concerns, deficits, or other bullish narratives.
“What’s evident is that macro funds hold more gold now than they have in recent history,” Ghali said. He added that CTAs are “effectively max long,” while Chinese ETF outflows have resumed, and Shanghai trader positioning reflects gold’s appeal amidst a weakening domestic currency and struggling stock and property markets.
Despite the economic challenges facing Chinese investors, Ghali observed a “buyer’s strike” in Asia’s physical gold markets, with visible short positions remaining near decade lows. He warned that while the fundamental backdrop for gold remains strong, the near-term outlook carries significant risks due to the current crowded positioning.
After reaching new all-time highs last week, gold prices have since retreated, with spot gold dipping below $2,500 per ounce twice during Wednesday’s trading session. Spot gold last traded at $2,507.60 per ounce, marking a 0.68% decline on the day.
