Offsides Positioning in Gold, Bonds and the US Dollar Will Make for an Interesting Fall

We are living through a period of extremely crowded trades at the moment, as Jeff Gundlach notably quipped several days ago. The risk in crowded trades is of course that what would otherwise be relatively minor risk reversals can cause massive covering of positions resulting in large moves in the underlying. Ditto when those positions are levered, like options or futures contracts. But right now we observe not only one crowded trade, but two (short gold, short treasury bonds) going on three (long the US dollar). As we will see, crowded trades eventually get reversed, which is what makes this extreme positioning trifecta so interesting. In all the charts below we plot the total speculative positioning in options and futures contracts as a percent of open interest as the red line on the right axis. We plot the underlying on the left axis with the blue line.

Starting with gold, we can see that speculators registered an extreme position in gold on July 20th and as of last week they became net short of gold for the first time this cycle, and indeed for the first time since 2001. Previous episodes of extreme gold positioning (which for speculators was actually just a very small long position) resulted in sharp price increase, averaging 10.6% over the next three months and 16.2% over the next year, as the first table below shows. What is interesting is that speculative positioning in gold right now is even more extreme than it was in late 2015, which resulted in a 21.6% jump in the price of gold over the next year. Though to be fair, the move didn’t begin in earnest until six months after the extreme in positioning was first registered.