zealllc.com / Adam Hamilton / July 21, 2017
The gold-futures and silver-futures short positions held by speculators have rocketed up to extremes in recent weeks. These elite traders are aggressively betting for further weakness in gold and silver prices. But history has proven extreme shorts are a powerful contrarian indicator. Right as speculators wax the most bearish as evidenced by their collective bets, gold and silver decisively bottom and birth major new rallies.
Futures trading has a wildly-outsized impact on gold and silver prices, especially over the short term. It is amazing how much volatility futures speculators’ collective buying and selling generates, often drowning out everything else. Two factors are responsible for this dominance. The extreme leverage inherent in futures trading and the unfortunate fact the resulting gold and silver prices are the world’s reference ones.
Normal investment capital flows occur with no leverage, the vast majority of stocks and bonds are bought outright. So buying and selling isn’t multiplied. Some stock traders use margin, which for many decades has been legally capped at 50% in the US. So they can borrow up to half their stocks’ purchase prices, or run 2x leverage. That gives any given capital flows, buying or selling, twice the price impact of outright ones.
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