Gold: November Volume & Diverging Market

There continues to be a significant divergence developing within the gold market. As we saw three weeks ago, investor demand in North America has fallen to near-decade lows. You can see the previous article. November concludes, and gold sees its single-highest ever monthly trading volume on the New York COMEX exchange. This is at, at over 7.1 million contracts. Prices remain in one of the tightest ranges in recent memory. They oscillate by just 3.5% since the beginning of October.

Gold and COMEX

Yes, we know that the majority of the trading activity which occurs on the COMEX is on paper only. Yet, the COMEX is also the primary way in which large institutions will purchase gold in North America. Banks, hedge funds, and commodity funds do not buy individual coins and bars. They generally purchase on the futures market. Then they either stand for delivery or roll their contracts over before expiration. Thus, when we observe record-breaking monthly volume on the COMEX exchange, this is a signal we should pay attention to. Even if we are physical-only investors. In technical analysis, we say “volume precedes price." This is as insider buying and selling trigger volume indicators before the actual changes in price. Record-breaking volume does not happen without reason. With each buy and sell, metal transfers from weak hands to strong hands. One or more entities are positioning now in the gold market. The only question is: do we have the patience to find out why?

Gold Mining Bifurcation

Again, as physical metals investors, it often pays to monitor other sub-sectors of precious metals. This is to gauge the overall pulse of the market. Interestingly, although we see record monthly volume on the COMEX, we see 2.5-year low volume when looking at the same chart. But, for the GDX gold miners fund: Keep in mind the last time volume was this low on the GDX. The fund was 38% lower than it is today. Gold mining investors, it seems, have largely lost interest in the sector amidst the flat prices of 2017.

How Do We Reconcile This Data?

We continue to suspect that high-powered money from institutions is moving into gold itself. Meanwhile, the mining sector is seeing apathy at the continued range-bound prices. The mining sector tends to attract a more significant portion of speculative investors. We also know that a part of the speculative “anti-dollar” capital finds an outlet in the recently-hot cryptocurrency market (i.e., Bitcoin). This sector also tends to attract a more significant portion of speculative investors. In sum, we see multi-year low demand volume amongst US coin and bar investors. We also see a multi-year low volume within the gold mining sector. Meanwhile, during the very same month, certain entities are purchasing record numbers of contracts. Each contract represents 100 ounces of gold on the futures exchange. Some of these entities will indeed stand for delivery.

The only thesis we can arrive at is that “smart money” is positioning now. It is during the later stages of what is a 5-year basing process for gold prices. Meanwhile, “speculative money” is mostly absent.

Of course, we are not referring to readers of this article in the above categories. The very fact that you have chosen to read about the gold market here during this time shows that you seek to act with a level of independence from the mainstream. This is during a time of decade-low participation amongst other US investors  Still, we cannot ignore these volume numbers. As a precious metals investor, one could not ask for a better scenario. We have flat prices overall since 2013. We have record-high volume entering gold on the institutional side. Then we have the multi-year low volume on the retail side and within the mining sector. As contrarians with a multi-year time horizon, we are quietly smiling at the setup.  

Christopher Aaron, Bullion Exchanges Market Analyst

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. This is where he specialized in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. Technical analysis shares many similarities with mapping. They both base on the observations of repeating and embedded patterns in human nature. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit. This article is a third-party analysis. It does not necessarily match the views of Bullion Exchanges. Readers should not consider it as financial advice in any way.