Momentum shocks driven by quantitative fund deleveraging are nearing their end, and the gold market may be approaching a critical turning point.
Daniel Ghali, head of metals research at Deutsche Bank, noted in the latest "DB Metals All-Flow Report" released on October 15 that the deleveraging of quant fund risk-parity portfolios has reached the 90th percentile of the bank's full sample since 2010, triggering indiscriminate capital flows across global markets. Against this backdrop, algorithmic selling in gold has nearly reached "absolute exhaustion," and CTA funds are being forced to buy back roughly 20% of their net short positions, which could form a self-reinforcing algorithmic short-covering loop and lay the groundwork for stronger gold prices in the fourth quarter.
Deutsche Bank's simulation data show that under almost all price scenarios, algorithmic trading systems now lean toward buying gold. At the same time, physical flow tracking data show that even after stronger-than-expected CPI data pressured gold prices, net inflows into spot gold that day still posted a strong performance, with buying mainly coming from commercial participants. This combination of signals further strengthens Deutsche Bank's optimistic view on gold's near-term trajectory.
Deleveraging Reaches Historic Extremes, Precious Metals See Indiscriminate Buying
Deutsche Bank's updated long-short quant fund risk-parity chart shows that leverage in volatility-targeted portfolios fell sharply on the most recent trading day, with the scale of deleveraging ranking at the 90th percentile of its full sample since 2010, an extreme historical level.
This deleveraging process has triggered indiscriminate buying in the precious metals market. Because CTA funds had previously held net short positions in the precious metals sector, the deleveraging by quant funds instead drove passive buying of precious metals. Deutsche Bank expects this deleveraging to force CTA funds to buy back short positions equivalent to 20% of their maximum position size in gold, add 7% to silver, 13% to platinum, and 15% to palladium.
It is worth noting that CTA positioning in platinum and palladium has reached "effectively maximum short" levels, while silver previously still had considerable room for shorting. Deutsche Bank pointed out that leverage dynamics are highly correlated with the global market covariance matrix, and correlations change over time, making them extremely difficult to predict. However, the current macro environment of rising AI-related concerns and front-loaded Fed rate hike expectations is an important reference for understanding the backdrop of this deleveraging.
After Algorithmic Selling Is Exhausted, Gold's Rebound Path Becomes Clearer
Deutsche Bank believes the gold market is in a critical window after algorithmic selling has been exhausted. Its simulation results show that under almost all price scenarios, algorithmic systems now lean toward buying gold, and the upward price momentum from CTA short covering will further trigger subsequent programmatic buy orders, forming a self-reinforcing positive feedback loop.
However, Deutsche Bank also noted that CTA funds would need gold prices to rise to around $4,370 per ounce to trigger the next round of large-scale programmatic buying. This means that after an initial algorithm-driven rebound, whether the rally can continue upward still depends on two major supports: first, resilient structural physical demand, and second, whether discretionary capital's ample "dry powder" can be activated to enter the market, jointly pushing gold prices into the next leg higher.
In addition, Deutsche Bank pointed out that in a scenario where stock markets experience a relatively large decline, gold is currently expected to play the role of a relative safe-haven asset. This is precisely a direct manifestation of how the quant fund deleveraging mechanism is currently favoring gold buying.
Historical Echoes: Current Environment Resonates With the October 2022 Low
Deutsche Bank invoked a historical analogy, comparing the current market environment with the October 2022 gold low. The report noted that deep into the most aggressive rate hike cycle in recent years in 2022, gold prices never effectively broke below key support. At that time, the Shanghai gold premium remained consistently above +2%, implying unusually strong demand in the world's largest consumer market, but Western investors remained persistently bearish due to memories of the 2011 gold price crash.
Ultimately, on November 4, 2022, gold prices rose against the trend even as nonfarm payroll data beat expectations and rate hike expectations strengthened further. Only afterward did the market learn that China's central bank had increased its official gold reserves for the first time in three years in the previous month, and that year ultimately recorded the largest official-sector gold purchases since data began in 1950, with non-central-bank official sector demand contributing the bulk of the increase.
Deutsche Bank believes that in hindsight, the starting point of gold's multi-year bull market appears almost obvious, but at the time, investors needed to stay composed amid the loudest noise. This historical narrative forms a clear echo with the current market environment.
Copper and Zinc Under Pressure, but Copper's Fundamentals Remain Solidly Supported
In sharp contrast to precious metals, this quant deleveraging has caused significant selling pressure on copper and zinc. Deutsche Bank expects CTA funds to sell positions equivalent to 24% of their maximum position size in copper and 20% in zinc, because the deleveraging shock is sweeping through this crowded momentum trade.
Nevertheless, Deutsche Bank remains optimistic about copper's medium- to long-term outlook. The report noted that copper market micro-structure support is extremely strong, and the current tightness in copper supply is among the scarcest environments on record. Deutsche Bank believes that regardless of how this momentum shock plays out, copper prices still have substantial upside, and the current selling pressure does not change its fundamental logic.
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