Gold: Long market plumbing – TDS

Markets continue to expect large-scale CTA buying activity in Gold markets, tallying up to a massive +20% of max size into this week's NFP in any scenario for prices, reflecting a rise in leverage and signal strength as Liberation day's vol-shock continues to reverberate across markets, TDS' Senior Commodity Strategist Daniel Ghali notes.

Breakout from April downtrend fuels short covering in Gold

"Prices have now broken out of their downtrend set from April highs, which should continue to fuel short covering and disincentivize new shorts from proprietary traders, family offices and small traders. The rise in net non-commercial length from last week's COT report is encouraging, but we find that macro funds have still not meaningfully participated.

"Zooming out, aggregate open interest in CME Gold is now approaching extreme lows that have historically been associated with a high probability of strengthening prices (see chart-of-the-day below), underscoring our view that although Gold is perceived as a crowded trade, it is in fact under-owned. With macro funds largely flat in Gold post-liberation day, signs of selling exhaustion from ETF holders, incoming CTA flows, and historically strong forward returns from such low levels of aggregate open interest, prices are likely to be bolstered by positioning alone."

"This set-up for flows is particularly surprising amid the ongoing megatheme — Gold's rally is associated with the USD partly losing its store of value function. Gold's rally isn't about demand, it's about trust. How did we end up with long capitulation at the highs? We also expect silver to benefit from CTA buying activity over the same horizon."