Volume Precedes Price

When I first earned my NASD Series 7 "stockbroker license" thirty-four years ago, I had the privilege to learn at the feet of industry veterans, some of whom had been in the business since the 1950s. They passed along to me some tried-and-true adages, most of which remain relevant today.

• With the ongoing breakout in the gold price above $2100, I'm reminded of one of those adages as I type this week's post: "volume precedes price". What does that mean? In stockbroker terms, an equity is dead money if it languishes at a low price and with low trading volume. (Does this sound like a few of your mining shares?) However, before price turns higher, trading volume often picks up. This uptick in volume is typically a sign of growing/new investor interest in the equity, and in many cases, this renewed interest in the shares eventually leads to a higher price.

For years at TF Metals Report, we've been able to translate this adage to COMEX gold—with one difference. It's not daily trading volume that is noteworthy. Instead, it's the volume of total contract open interest. In the simplest explanation, total contract open interest grows as speculative hedge fund investment grows. The funds get long and The Banks get short, and open interest increases.

To wit, it's very difficult for COMEX gold to rally in price when total open interest of COMEX contracts is at multi-year lows. Again, think of it as the distressed and overlooked common equity that the old stockbrokers used to talk about. Low volume means that nobody cares. It's dead money with nothing to move it.

On February 16, 2024, the total open interest for COMEX gold stood at just 406,999 contracts. That level was a five-year low versus a total of 408,234 last seen on December 18, 2018. As recently as last Wednesday, February 28, total interest in COMEX gold remained near those levels at 411,698 contracts. And then something began to change.

On Thursday, February 29, the price of COMEX gold rallied $12. However, total contract open interest rose by 12,400 contracts that day. This was your first hint of a sea change of hedge fund and institutional interest in owning COMEX gold.

Then on Friday, March 1, as price rallied $42, total contract open interest exploded higher by over 30,000 contracts. So that's a $54 rally over two days, driven by a massive surge in investor interest that resulted in an open interest expansion of nearly 43,000 contracts or about 10%.

(As an aside, consider for a moment how much greater the price rally would have been if sellers of existing contracts were needed to be found for all of this new Spec buying interest. Instead, The Banks were able to control or "tamp down" the rally by issuing 43,000 new contracts, taking the short side versus the hungry Spec longs.)

The rally and surge in open interest is definitely continuing on Monday, March 4. As I type, the price of COMEX gold is up another $25, and you can be certain that once the final open interest numbers are published this evening, the total number of COMEX gold contracts will have again grown significantly.

Putting it together, what do we have? Growing mainstream interest in owning COMEX gold futures is driving price higher and forcing Banks to contain the rally by issuing new contracts. Volume (as in COMEX open interest) is preceding price.

So what does this mean for price going forward?

Simply put, by any historical measure, there's A LOT of room for total contract open interest to grow. A typical open interest level in bull markets is 550,000 to 600,000 contracts. Again, as of March 1, we were only at 454,383. Price is up another $25 as I type, and total open interest will likely rise another 10,000-15,000 contracts today too.

Now, the link between price and open interest is not linear, and we can't simply extrapolate both totals forward. However, it may be a gross oversimplification, but think of the direction forward this way:

• The rally to $2300 that we've been expecting for months finally begins. 
• Price rallies about $40 for every 30,000 new contracts of added open interest.
• As such, total COMEX gold open interest rises to 600,000 contracts.
• At $2300, a future Commitment of Traders report shows that the Large Spec hedge funds are now net long about 300,000 contracts, the peak level this group has often reached in past price rallies.
• That same Commitment of Traders report shows that the Commercial net short position has grown to 350,000 contracts, again commensurate with past peaks.
• At that point, it's time for the old "Wash and Rinse Cycle" to begin.

This isn't to say that price can't exceed $2300. It most certainly can, and it will. But please understand that all bull markets in gold will be contained by the current fractional reserve and digital derivative pricing scheme. The typical bull market unfolds in a two-steps-forward-and one-step-back pattern, and I have no doubt that this next/current rally will take the same path.

As such, it's best to control your emotions and buy/trade accordingly. It's highly doubtful that the gold price is headed to $2500 and then $3000 in short order, as many "experts" on Twitter/X proclaimed over the past weekend. Instead, you should expect the usual bull market pattern. What would that look like? Again, a gross oversimplification that hopefully makes the point.

• A rally to $2300, as we discussed in our 2023 and 2024 macrocasts.
• At that point, price and open interest will be stretched to where a pullback is inevitable.
• The "Spec Wash and Rinse Cycle" drops price back to $2100-2150, and total COMEX gold open interest plummets back under 500,000 contracts.
• At that point, the next upleg of the bull market begins and price moves to $2500 with total open interest expanding again to 600,000 contracts.

Of course, I'd love to be wrong about all this. I've spent the past fifteen years fighting The Banks, and nothing would make me happier than to see them get crushed under the weight of their fraudulent pricing scheme of naked shorts and promissory delivery notices. However, if the collapse isn't yet imminent, then we must expect the gold price to move gradually higher in stages— not the "to the moon" mentality that ultimately frustrates so many on our side.