Massive ‘capitulation event’ could be happening in gold – TD Securities

(Kitco News) With gold erasing $70 this week while the U.S. dollar surges and crude oil sells off, TD Securities is not ruling a “massive capitulation” event in gold.

The precious metal was trading near 8.5-month lows Wednesday as the U.S. dollar index rose to 20-year highs and crude oil fell below $100. August Comex gold futures were last at $1,737.10, down 1.52% on the day.

“A major capitulation event may be unfolding in gold, just a few days after our put spread expired (a strategist’s kryptonite!). We see evidence that the steepest outflows from broad commodity funds since the Covid-19 crisis may be catalyzing a series of cascading liquidations from various speculative groups,” said TD Securities senior commodity strategist Daniel Ghali. “This argues for substantial downside for gold in coming sessions as participants are forced to sell in a vacuum.”

This trend is being observed across the whole commodities space, as investors exit their long positions amid fears of a potential recession denting future demand.

“A money manager rush for the exits is contributing to the slump in our demand signals, as broad commodity indices are weighed down by massive outflows amid recession fears. The top 15 funds by AUM have posted fund outflows above $1 billion over the past week alone, and are experiencing the steepest outflows since the Covid-19 crisis,” Ghali noted. “This highlights that a potential capitulation from this cohort is contributing to the slump in prices for all commodities, which helps to explain the collapse in our real-time commodity demand indicator.”

Ghali highlighted copper in particular, noting a sustained downtrend as the metal dropped to 20-month lows Wednesday. “Unless the red metal miraculously trades above $9,750/t by year-end, copper markets are settling into a sustained downtrend to reflect a sharp slowing in commodity demand,” he said.

For gold, a drop below $1,800 an ounce and then below the key support of $1,780 an ounce points to “indiscriminate selling by broad commodity funds.”

“[The selloff] has likely catalyzed a massive CTA selling program as trend followers respond to deteriorating momentum. This also coincides with coordinated selling from Shanghai’s top gold traders as CNY-denominated prices begin to slump,” Ghali added.

This is a major red flag for gold, given the number of long positions accumulated since 2020 when the precious metal surged above $2,000 an ounce and set new record highs.

“We have cautioned that the substantial size accumulated by this cohort during the pandemic appears complacent. In a liquidation vacuum, these positions are now vulnerable,” Ghali warned. “A sustained downtrend could form in gold if central banks, facing a credibility crisis, remain committed to their battle against inflation and keep rates elevated for longer than they otherwise would.”