The recent slide in gold prices has been partly attributed to selling by trend-following funds, according to Bank of America (BofA). Analysts noted that commodity trading advisors (CTAs) “continued to unwind gold longs as the yellow metal declined for the second straight week.”
“Our more risk-averse models have already stopped out of their gold longs while some CTAs with higher risk tolerances may still be long as price trends continue to give bullish signals regardless of model speed,” wrote BofA analysts led by Chintan Kotecha in a client note.
The bank’s CTA model indicated that gold remained fully long across short-, medium-, and long-term timeframes through the end of October, with trend strength still at 100%. However, the report also highlighted that several CTA models have hit stop-out levels, a pattern that has historically been linked to increased volatility from systematic selling.
BofA added that “trend followers grew aluminum longs as futures posted a fifth consecutive week of gains,” pointing to a shift in exposure within the commodity complex as investors rotated away from gold.
“These moves could leave aluminum as the most stretched commodity position among trend followers, depending on universe and risk budgets,” the analysts said. “In other commodities, our model indicates that trend followers could buy soybean and soybean meal futures next week.”
The report also showed that trend-following funds remain heavily positioned in global equities, with long exposures “stretched” across markets in the U.S., Europe, and Japan after recent record highs.
They cautioned that “while stop-loss levels are still relatively distant, a sharp pullback could trigger significant unwinds,” estimating that CTAs could offload up to $148 billion in equities in a market downturn scenario over the coming week.
In fixed income, BofA observed that “stretched UST longs” were close to triggering sell signals following the latest Federal Reserve meeting, as rising yields and a stronger dollar pressured positions.
“The longs held on thanks to falling 10yr yields on Friday, but triggers remain close,” the analysts wrote, adding that CTAs are likely to continue buying the dollar against all major currencies in the near term.