Deutsche Bank warns that gold is experiencing its most bearish positioning in years, yet prices have failed to make new lows, suggesting a reversal signal is building.

According to the latest commodities research report released by Deutsche Bank on September 30, the gold market currently exhibits a triple characteristic of being "ignored, oversold, and underallocated," with positioning extremes approaching what could be described as an absolute capitulation moment.

The report notes that Commodity Trading Advisors (CTAs) have sold 52% of their maximum position size over the past month, marking a monthly outflow in the 3rd historical percentile, yet gold prices have consistently failed to print new lows. This divergence signals the presence of strong hedging demand underpinning the market.

Daniel Ghali, Head of Metals Research at Deutsche Bank, explicitly called to "Buy in Sorrento" in the report, arguing that the current moment is when alarm bells are ringing loudest. He warned that if gold prices decline further in the coming week, CTAs could push positions to "effective max short" levels, at which point all trend signals would point decisively downward, constituting an absolute capitulation moment for the gold market. Any further selling beyond that would require discretionary traders and macro funds to establish large-scale net short positions against a backdrop of continued central bank buying, a scenario with extremely low probability.

Extremely Bearish Positioning: Multi-Year Low Allocation Levels

Deutsche Bank research shows that gold's current positioning has reached its most bearish level in years, with multiple indicators simultaneously flashing warnings.

CME aggregate open interest for gold currently stands at only approximately 400,000 contracts, a figure that is already at extreme lows. Particularly noteworthy is that this phenomenon is occurring against a backdrop of gold's rising weight in broad commodity indices and Deutsche Bank's calculations showing that risk parity and volatility-target portfolio leverage has already hit reasonable caps. The growing contribution from two "sticky" sources of positioning stands in stark contradiction to the extreme lows in aggregate open interest, making this indicator's warning signal even more prominent.

At the CTA level, Deutsche Bank estimates that CTAs currently hold their largest net short position since October 2021. Over the past month alone, CTAs have sold 52% of their maximum position size, with this monthly outflow sitting in the 3rd historical percentile, representing an extremely rare large-scale sell-off.

The situation for discretionary traders is equally concerning. Deutsche Bank's discretionary trader futures positioning indicator, constructed from CFTC Commitments of Traders (COT) data on money manager positions after stripping out CTA factors, shows that related long positions have been liquidated by 55% from the peak levels accumulated in June. Meanwhile, spot flow tracking data also indicates that discretionary traders have largely remained on the sidelines over the past several months.

Prices Fail to Make New Lows: Mysterious Buyers Supporting the Market

Despite the historically unprecedented scale of CTA selling, gold prices have consistently failed to make new lows. Deutsche Bank believes this divergence points to increasingly strong hedging demand in the market.

Deutsche Bank's assessment is that buying demand from central bank reserve management institutions is rising, driven by factors including escalating geopolitical uncertainty, US Treasury "Treasury Twist operations," and the influence of Japan's Foreign Exchange and International Reserve Account (FIMA) related news flow. These factors collectively reinforce the rationale for reserve management institutions to increase their gold allocations.

At the same time, for institutional investors, the case for adding gold to alternative asset portfolios for diversification is strengthening against a backdrop of valuation pressures on yield-sensitive alternative assets.

However, macro investors and discretionary market participants remain largely on the sidelines. Deutsche Bank notes that the current market setup is increasingly resembling the situation in 2022, when institutional buying quietly absorbed massive CTA selling, ultimately becoming the foundation for a market reversal.

Absolute Capitulation Moment Approaching: Liquidity Vacuum Amplifies Risk

Additionally, Deutsche Bank warns that the market is approaching a critical technical threshold. If gold prices decline further in the coming week, CTAs could push positions to "effective max short" levels, meaning all trend signals within Deutsche Bank's monitoring scope would point downward in an extreme positioning state.

This risk scenario becomes even more realistic due to an impending liquidity vacuum: China's Golden Week holiday coincides with the London Bullion Market Association (LBMA) annual conference, significantly reducing market participation and making the amplifying effect on price volatility impossible to ignore.

Deutsche Bank believes that should this scenario materialize, it would mark an absolute capitulation moment for the gold market. Any subsequent push to drive prices lower would require discretionary traders and macro funds to establish large-scale net short positions against the backdrop of continued buying by central bank reserve management institutions, which logically constitutes an extremely improbable scenario.

Based on this analytical framework, Daniel Ghali issued a clear buy signal in the report, arguing that the current moment is when alarm bells are ringing loudest, with "Buy in Sorrento" serving as the footnote to his core trading recommendation.