It is important for investors in physical gold to periodically follow what is happening in other segments of the precious metals industry. Today we will examine volume in the futures market.

Futures contracts represent the ownership of gold at a future time. As designated by the contract expiration date. The futures market is often referred to as the “paper market”. Due to the fact that many multiples of contracts trade hands for each gold bar that backs it up. The fact remains that each contract ultimately allows the holder to receive delivery of 100 ounces of physical gold bullion. In general, the futures market is what larger institutions and hedge funds use. That is when they desire to take control of tens of thousands of ounces of gold in a short period of time.

Ultimately the physical market is what drives long-term price trends; however, over the short run, the more speculative interest which participates through futures has a major impact on price swings. For gold investors who are looking to time either their purchases or sales for greater value, paying attention to indicators on the futures market can help.

Futures Volume – All-Time Highs

One such indicator we will discuss today is futures volume; stated another way: how many contracts for delivery changed hands during a given period. Let us look at the history of gold trading volume on a monthly basis since 1980:

Notice in the lower right of the chart. The highest monthly volumes of all time were recently registered from late-2017 through mid-2018. With certain months witnessing over 700 million contracts traded.

In other words, the most interest that has ever been recorded in gold futures history occurred just one year ago.

Note how the volume witnessed then exceeded even the volume from the all-time price high near $1,900 per ounce in 2011. It also exceeded the amount of volume witnessed in 2013 – 2014. When gold prices were in the same range as they were today in the upper $1,200’s.

Something unique happened in 2018.

Let us zoom the above chart in to see detail from the 2011 – 2018 period:

When we examine the zoomed-in view, we can indeed see that the three highest monthly volume spikes of all time occurred when gold prices ranged between $1,275 – $1,350, between November 2017 and May 2018.

Volume Important at Price Extremes

It is important that we recall what occurred in gold following this all-time high volume period: gold declined from a high of $1,369 in May 2018, down to a low of $1,160 in August, over a $200 decline.

In other words: the highest volumes of all time occurred at a relative peak for gold prices, prior to a significant decline.

We must consider this carefully:

  • a record number of contracts were purchased for gold at the 2017 – 2018 peak
  • therefore, a record number of contract holders have been underwater (at a loss) on their purchases since May 2018

When an institution which is using a large amount of leverage (hedge fund, etc.) purchases something which soon begins falling in price, what is the one thing that institution will look to do once the price recovers back to its original buy price zone?

Sell at break-even.


What Does This Mean for Gold Investors?

Resistance, a term which equates to selling pressure, for gold in the upper $1,200’s to low $1,300’s will thus be formidable.

We know this because the highest volumes of contracts ever recorded in gold trading history changed hands. This has been during the relative price peak between Q4 2017 and Q2 2018.

Many of those contract holders have been underwater for nearly a year – and they are going to use any attempt by gold to return to this price zone to sell.

Physical gold investors should thus prepare for a retracement in gold prices over the next 1-2 quarters. It would take an equally large amount of new futures buyers to overwhelm the selling pressure from those cutting their losses at the present levels. Typically, in order for a market to witness this kind of new buying, it will have to occur in a series of retracements and advances. At least until the last of the sellers have been dislodged.

This is a process of “chipping away” at the overhang of futures sellers that a market must usually go through to overcome all-time high volumes.

Key Takeaway

In the highest of probabilities, gold will not be able to overcome the all-time largest volume of contract holders who will be looking to sell above current prices. A retracement at least back to the low $1,200’s is likely. After which we will evaluate a host of signals to gauge the potential bottom. Physical gold investors should look to save some dry powder for the retracement that is coming due to futures sellers.


Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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