Gold Hit by Algo Selling as Structural Weakness Builds

Key Moments

TD Securities’ Daniel Ghali signals that CTAs are positioned to unload Gold unless prices see a strong rebound in the coming week.
Gold is described as trading like a risk asset, influenced by USD diversification flows and wartime damage to official-sector surpluses in the Gulf and East Asia.
Ghali recommends waiting for CTA long capitulation and flags further potential unwinds of the so-called “debasement trade,” with upcoming catalysts on the horizon.

CTA Positioning Raises Downside Risk for Gold

TD Securities’ Senior Commodity Strategist Daniel Ghali cautions that Commodity Trading Advisors (CTAs) are inclined to reduce Gold exposure unless prices mount a sharp recovery over the coming week. He indicates that algorithm-driven strategies are set up in a way that would trigger selling in most price scenarios absent a notable rebound.

Gold Trading More Like a Risk Asset

Ghali explains that Gold has recently been acting more like a risk asset, rather than a traditional safe haven, due to flows linked to diversification away from the USD and the impact of wartime conditions on official-sector surpluses. He notes that the war in the Middle East has harmed Gulf-region economies and meaningfully reduced surpluses in East Asia, temporarily disrupting official-sector demand for Gold.

Institutional Exposure and Structural Vulnerabilities

According to Ghali, this disruption in official-sector participation has left institutional investors more exposed. He argues that this has contributed to a self-reinforcing wave of liquidations, with fewer natural buyers to absorb the selling. While many market participants have attributed the recent Gold decline to broad-based deleveraging, Ghali points out that TD Securities’ estimates of quant fund leverage have remained unchanged since Day 2 of the war. From his perspective, that stability in leverage points instead to what he describes as a structural crack in the market.

Waiting for CTA Capitulation and the Future of the Debasement Trade

Ghali characterizes the magnitude of recent selling as substantial but emphasizes that markets remain far from a full capitulation by CTAs. He suggests that investors should at least wait for a decisive capitulation of CTA long positions before attempting to buy into the recent weakness.

He also underscores the prospect of additional unwinds in the so-called “debasement trade,” sometimes referred to as the fear trade. Ghali highlights that there are upcoming catalysts that could drive this process further, explicitly pointing to the Supreme Court decision on Lisa Cook’s trial.

Key Themes in Ghali’s Assessment

Theme	Ghali’s View
CTA behavior	“CTAs will sell gold in most scenarios. A big uptape is required over the coming week, only to prevent algos from selling most of their remaining longs.”
Impact of the war in the Middle East	“The war in the MidEast has inflicted significant damage to Gulf economies, but has also significantly reduced surpluses in East Asia, creating a rupture in official sector demand for the time being.”
Market structure and liquidations	“This left the widespread participation from institutional investors vulnerable, fueling a cycle of liquidations with fewer outs.”
Leverage and structural cracks	“…our estimates of quant fund leverage have not budged since Day 2 of the war, and our read-through instead points to a crack in the structure.”
Debasement trade outlook	“At the very least, look for CTA long capitulation before buying-the-dip, but we point to upcoming catalysts for a further unwind of the ‘debasement trade’ (fear trade) including the Supreme Court decision on Lisa Cook’s trial.”