Gold's Decline Partly Due to CTA Selling: Bank of America

The recent decline in gold prices was partly driven by selling from trend-following funds, according to Bank of America (BofA) analysts. The bank reported that Commodity Trading Advisors (CTAs) "continued to liquidate long gold positions as the yellow metal fell for the second consecutive week."

Gold Liquidation and Commodity Rotation

• CTA Risk Models: BofA analysts noted that their more risk-averse models have already stopped out of long gold positions, while higher risk-tolerant CTAs might still hold longs as price trends signal bullish momentum, regardless of model speed.

• Stop-Out Levels: BofA's CTA model showed gold remained in full long positions across short, medium, and long-term horizons at the end of October, with trend strength readings still at 100%. However, the report warned that many CTA models have reached stop-out levels, historically linked to increased volatility from systematic selling.

• Rotation to Aluminum: Trend-followers increased their long positions in aluminum, as futures recorded their fifth consecutive week of gains, signaling a rotation away from gold within the commodity complex. Aluminum may become the "most extended" position among trend-following CTAs.

• Other Commodities: BofA's model suggests trend-followers may buy soybeans and soybean meal futures next week.

Broad Movements in Other Markets

• Global Equities: Trend-followers still hold "extended" and substantial long positions in global equities (US, Europe, Japan) after hitting new record highs.

  • Liquidation Risk: The bank warned that "stop-loss levels remain relatively far, but a sharp downturn could trigger significant liquidations." Their models project CTAs could sell up to $148 billion in equities in a downside scenario over the next week.

• Fixed Income: "Extended long positions in US Treasuries" approached selling triggers following the latest Federal Reserve meeting, as higher yields and a strong dollar pressured positions.

• FX Markets: CTAs are expected to continue buying the US Dollar against all major tracked currencies.