Record short positioning seen in Gold and TNOTE

Summary:

• Hedge funds build massive short position in US Treasury markets

• Gundlach warns this could contribute to a big short squeeze

• Gold positioning turns most negative since Dec 2001

The latest positioning data from the CFTC has revealed some interesting developments with an increase in the number of speculative shorts in US treasury markets and in long USD positions. Excessive speculative positioning can often be seen as a contrarian signal and as such it is not surprising that Jeffrey Gundlach, a prominent hedge fund manager, has warned that this could cause “quite a squeeze.”

The net speculative positioning in Treasury futures has turned further negative (right hand axis inverted) as hedge funds increase their bets on higher US yields (lower TNOTE price). Note that speculative positioning has exhibited a fairly strong inverse correlation with yield over the past couple of years but the additional rise in net shorts has seen a notable divergence appear. Source: Zerohedge

The TNOTE on xStation has been moving higher today and if this short squeeze does occur then there is a fair amount of scope for a big move. Price is back near a 3-month high around 120.60and is also the closest it’s been to its 200 day SMA in almost a year. The market has been in a downtrend for the majority of the time since Trump’s election victory back in 2016, as can be seen by the amount of time spent below the 200 SMA.  

TNOTE remains in a downtrend from a longer term perspective as shown by the price being below the 200 day SMA. Near-term resistance may be found around 120.60 and 121.10 - where the 200 day SMA is at present. Source: xStation

Due to Gold exhibiting similar characteristics to that of the TNOTE the markets have previously reacted in kind to large US events (EG Fed decisions, NFP, elections etc). With the Fed minutes and also Fed chair Powell’s Jackson Hole speech this week there are certainly events which could cause some large moves in the not too distant future. Gold fell to its lowest level since January 2017 last week and perhaps even more importantly, net short positioning has turned negative by the most since December 2001.  As Peter Boockvar notes, "for those who care about gold such as myself, in the just released CFTC data for the week ended Tuesday, speculators went net short for the first time since December 2001 when gold was priced at $275 an ounce. It’s tough to find a more contrarian indicator."

Gold positioning has turned the most negative in 17 years, which could be seen as a possible contrarian sign for future price gains. Source: Zerohedge  

Gold fell once more last week, making it 9 out of the last 10 that we’ve got a red W1 candle. The long wick could be seen as indicative of some buying pressure while the recent shift to relatively extreme short positioning may also be seen as a contrarian buy signal. Source: xStation