Gold: Positioning washout risks and CTA selling – TD Securities

TD Securities’ Senior Commodity Strategist Daniel Ghali argues that Gold’s bull market is increasingly constrained as energy importers and Middle Eastern producers face shocks that erode official sector demand. With institutional and retail participation already elevated, TD’s simulations point to CTA selling in Gold over the coming week as algorithms capitulate on long positions for the first time since February 2024.

Bull trend faces CTA liquidation risk

"Energy importers, particularly in Asia, are facing a substantial energy shock that will significantly erode surpluses, easing the pace of diversification into gold. Middle Eastern nations face a severe economic shock that will similarly erode their gold purchases."

"Reports that Turkey has been mulling tapping into its gold reserve to defend the Lira abstract the fact that official sector gold demand is now facing its most significant headwinds since Russia-Ukraine."

"The rub: widespread institutional investor participation now has fewer outs, as the debasement trade rolls over with fewer Fed cuts, without excess money supply growth, and with alleviated concerns surrounding Fed independence into the Supreme Court decision for Lisa Cook's trial. "

"When you strip out the narratives, gold's bull market has been a function of a cascading set of capital pools that have participated in the yellow metal. The mechanics are analogous to a carry trade gone wrong, leaving a positioning washout as the balancing factor. "

"Widespread institutional adoption and unprecedented retail demand over the last months suggest the pain trade will likely remain to the downside. In the near-term, our simulations suggest that most scenarios will lead to CTA selling activity over the coming week, as algos capitulate on their longs for the first time since Feb 2024."

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