Gold: CTA selling risk and structural cracks – TD Securities

TD Securities’ Senior Commodity Strategist Daniel Ghali warns that Commodity Trading Advisors (CTAs) are likely to sell Gold unless prices stage a strong rebound in the coming week.

He argues Gold is behaving like a risk asset due to USD diversification flows and a wartime hit to official-sector surpluses. Ghali advises waiting for CTA long capitulation and highlights further potential unwinds of the debasement trade.

CTAs poised to liquidate Gold longs

"CTAs will sell gold in most scenarios. A big uptape is required over the coming week, only to prevent algos from selling most of their remaining longs."

"The war in the MidEast has inflicted significant damage to Gulf economies, but has also significantly reduced surpluses in East Asia, creating a rupture in official sector demand for the time being."

"This left the widespread participation from institutional investors vulnerable, fueling a cycle of liquidations with fewer outs. In turn, while participants assume that gold's sell-off has been a function of deleveraging, our estimates of quant fund leverage have not budged since Day 2 of the war, and our read-through instead points to a crack in the structure. "

"The scale of liquidations has been significant, but we remain far off capitulation. At the very least, look for CTA long capitulation before buying- the-dip, but we point to upcoming catalysts for a further unwind of the 'debasement trade' (fear trade) including the Supreme Court decision on Lisa Cook's trial."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)