Since early 2017, gold has strengthened from lows below $1,080 to around $1,340 today. The underlying factors that have helped gold strengthen since that time remain intact. We argue that gold should continue strengthening in the longer-term thanks to (1) moderate sentiment, (2) continued weakness in the US dollar, and (3) a weak outlook for real interest rates. While recent price action is somewhat concerning, gold remains in a clearly bullish trend.

Gold bulls are few and far between

Despite the 20%+ rally in gold since 2017, gold bulls are nowhere to be found. This isn’t entirely surprising given fears of accelerating inflation. In an environment where growth and inflation accelerate simultaneously, markets tend to fear a monetary policy response. Put another way, the Federal Reserve is much more likely to hike rates when inflation surges during a bull market. This explains why gold sold off sharply in the fourth quarter of 2016 – at the time, markets expected both growth and inflation to strengthen. This caused gold prices to fall. A similar (although less dramatic) dynamic is in play today.

The good news for gold bulls is that going long gold is a non-consensus trade. Data from the CFTC’s weekly Commitments of Traders report is visually illustrated below for reference:

Not many futures and options contracts long gold…

Source: CFTC, MarketsNow

As can be seen above, futures and options net long positions in gold are currently below 200,000. Historically, bullish extremes (two standard deviations above 1-year trailing averages) occur when there are at least 300,000+ contracts that are long gold. Today, 1-year z-scores are just 0.4x. We flag extended positioning as a risk when z-scores are at least 2.0x. The next chart looks at the net long position as a proportion of total open interest.

…and long positions relatively small as a proportion of open interest

Source: CFTC, MarketsNow