Gold
was crushed this week following the latest Federal Open Market
Committee decision. While the Fed didn’t taper quantitative easing
or hike interest rates, Fed officials’ predictions of future rates
proved more hawkish than expected. That ignited a powerful
US-dollar rally, scaring speculators into violently fleeing gold
futures. But that painful selling purge leaves gold’s near-term
setup way more bullish than it had been.
The
FOMC meets about every six weeks to make monetary-policy decisions.
This week’s latest one was universally expected to be uneventful,
with little market impact. Traders, analysts, and economists didn’t
think the Fed would declare any upcoming changes to its $120b per
month of quantitative-easing bond monetizations or
zero-interest-rate policy. Indeed the FOMC’s statement was
nearly identical to the prior one.
But
with every other FOMC meeting or once a quarter, the Fed releases a
supplementary document called the Summary of Economic Projections.
That includes a scatter chart known as the “dot plot”. It
summarizes individual Fed officials’ outlooks on
federal-funds-rate levels over the next few years. This dot plot
has proven notoriously inaccurate in forecasting future rate
changes, as the Fed chair himself often warns!
As
usual, Jerome Powell gave a press conference right after this week’s
new FOMC decision. One of the economics reporters participating in
that Zoom call asked him about the dot-plot changes. The following
is copied and pasted verbatim out of the Fed’s official transcript
of that event, where Powell dismissed the dot plot! “First
of all, not for the first time about the dot plot. These are, of
course, individual projections.”
“They’re not a Committee forecast, they’re not a plan. And we did
not actually have a discussion of whether lift-off [hiking the
federal-funds rate] is appropriate at any particular year, because
discussing lift-off now would be highly premature, wouldn’t make any
sense. If you look at the transcripts from five years ago, you’ll
see that sometimes people mentioned their rate path in their
interventions. Often they don’t.”
“And
the last thing to say is, the dots are not a great forecaster of
future rate moves. And that’s not because – it’s just because it’s
so highly uncertain. There is no great forecaster of future dots.
So, dots to be taken with a big grain of salt.” Interestingly
immediately after Powell again said ignore the dot plot, the
US benchmark S&P 500 stock index reversed sharply higher after
plunging 1.0% on those latest dots.
But
bonds, the US Dollar Index, and gold didn’t react to Powell’s “big
grain of salt” discrediting, they kept moving on that latest dot
plot. Given the violence of those moves, you’d think Fed officials
saw rate hikes coming later this year. But they were opining on no
federal-funds-rate increases in both 2021 and 2022! It was way out
in 2023, two-plus years from now, that the previous consensus of no
rate hikes shifted to two.
In
addition to still being an eternity away in financial-market terms,
those two hikes in 2023 weren’t a high-conviction view. The dots,
rate forecasts from individual FOMC officials, were
widely-dispersed. And the “Longer run” view on rates after 2023
didn’t budge this week, with these monetary-policy decision makers
still seeing the FFR eventually returning to the 2.25%-to-2.50%
range. This latest dot-plot shift was minor.
But
futures speculators ignored Powell himself and acted as if the FOMC
had formally declared rate hikes were imminent. As higher
interest rates make the US dollar relatively more attractive
compared to major competing currencies like the euro, the USDX
rocketed 0.8% higher in the wake of those dots! That was its
biggest daily surge since the end of April, and was what actually
wreaked the havoc in gold markets.
Gold-futures speculators look to the dollar’s fortunes as their
primary trading cue. Throughout millennia of human history, gold
has proven the ultimate global currency. It remains a direct
competitor to the US dollar. So specs watch the dollar like hawks
and often do the opposite with their gold-futures trading.
When they rush in or purge out en masse, that really moves gold.
These traders dominate its short-term price action.
That’s because gold futures allow extreme leverage far beyond
the decades-old 2.0x legal limit in stock markets. Before those
latest Fed dots unleashed that violent gold-futures puking, gold was
trading near $1,860 per ounce. So each 100-ounce gold-futures
contract was controlling $186,000 worth of gold. Yet the CME Group
running that market was only requiring specs to hold $9,000 cash
margins for each contract.
That
meant these traders could run extreme leverage as high as 20.7x!
Every 1% move in the gold price would impact their capital risked at
20.7%. If gold moved only 4.8% against their positions at maximum
margin, they would lose 100% of their capital risked. This
ridiculous danger forces gold-futures traders to maintain
incredibly-myopic ultra-short-term focuses. Their time horizons are
compressed into days and hours.
So
when the US dollar soared on maybe seeing the Fed hike rates a
couple times a couple years from now, gold-futures speculators
had to sell. Leading into this latest FOMC decision, gold had
been stable near $1,860 all day. But within minutes of the dots
shifting slightly that Powell often argues have nothing to do with
Fed policy decisions, heavy gold-futures selling pummeled this metal
sharply lower near $1,837.
For
normal traders not running crazy leverage, a 1.2% gold drop on a
perceived hawkish Fed is no big deal. But that loss was amplified
up to 21x for gold-futures specs, so they were forced to sell
regardless of their own gold outlooks. And unfortunately heavy
gold-futures selling quickly coalesces into a self-feeding
vicious circle. The more gold falls, the more these traders
have to sell or risk catastrophic losses.
The
more they sell, the faster gold falls! That cascading gold-futures
selling runs stops
on long-side gold-futures traders, while enticing big new short
selling. In the two hours between those latest Fed dots and the US
market close Wednesday, gold plunged 1.6% to $1,830. But
unfortunately FOMC-triggered US-dollar surges hammering gold don’t
usually run their courses until foreign traders have their chances
to react.
It
usually takes a day or two after a market-moving Fed decision for
gold to stabilize. It continued falling after the US markets closed
Wednesday, nearing $1,810. Then it rallied back near $1,825
overnight in early Asian trading, but selling resumed heading into
the Asian close. It intensified as European markets came online.
When the globe spun back around to the US open on Thursday, gold was
limping near $1,780.
That
was crazy. In 17 hours after the FOMC announced no slowing in the
blistering pace of QE money printing and no rate hikes, gold
plummeted 4.3% or $80! That was because six out of eighteen
top Fed officials decided they might see a slightly-higher
federal-funds rate two-plus years from now! And for the umpteenth
time, the Fed chair himself dismissed the dot plot as “not a great
forecaster of future rate moves.”
For
decades now, gold futures’ leverage-enabled tyranny over short-term
gold price action has endlessly frustrated precious-metals
speculators and investors. Gold-futures specs don’t command much
capital at all in the grand scheme of the gold markets, yet every
dollar they deploy can have up to 21x the gold-price impact
of a dollar invested outright! These traders punch way above their
weights in gold-price influence.
But
the silver lining to gold-futures-driven gold plunges is they are
very-short-lived. Heavy spec selling soon exhausts itself as
their very-finite capital firepower runs out. Once their likely
long and short selling is largely spent, that leaves room for
nothing but buying. So big gold purges even after
more-hawkish-than-expected FOMC decisions often quickly reverse,
driving gold sharply higher in proportional V-bounces.
Speculators’ total gold-futures positioning is only reported weekly
in the famous Commitments of Traders reports. While current to
Tuesday closes, those aren’t released until subsequent late Friday
afternoons. So the latest-available spec gold-futures data when
this essay was published was only current to June 8th. That
day gold closed much higher at $1,893, before slumping in the CoT
week leading into the Fed.
This
chart superimposes daily gold prices during the last several years
or so over specs’ weekly gold-futures positioning. Their total long
contracts are rendered in green, and their total shorts in red.
Specs’ collective positioning remained quite bullish for gold
even before its pre-FOMC slump and post-FOMC plunging. And all
that heavy selling since this June 8th CoT leaves gold’s near-term
setup far more bullish.
Gold’s current secular bull market was born in mid-December 2015,
incidentally right when the FOMC was
launching a new
rate-hike cycle after 7.0 years of ZIRP! Despite the
Fed hiking nine
times by late 2018, this gold bull continued advancing on
balance. At its latest $2,062 peak in early August, gold had
powered 96.2% higher over 4.6 years. After a healthy correction,
this bull is very much alive and well today.
Secular gold bulls run for a long time, the last one soared a
colossal 638.2% higher over 10.4 years ending in August 2011!
Naturally the longer its bulls last, the more bullish all traders
get on gold prices. That even includes those myopic hyper-leveraged
gold-futures speculators. Their total long contracts slowly meander
higher in uptrends as gold bulls mature, while their total shorts
drift lower in downtrends.
On
June 8th before gold fell 1.8% in the CoT week leading into the FOMC
and plunged another 4.3% in the 17 hours after, speculators’
gold-futures positioning was already quite bullish. Their total
longs at just 342.6k contracts were still low in their uptrend, way
down near its support. And their total shorts running at 97.8k
contracts were still high in their downtrend, up around resistance.
There was way more room for buying.
Since specs’ leveraged gold-futures trading dominates gold’s
short-term price action, I analyze every new CoT week’s positioning
data and its implications for gold in our weekly and monthly
newsletters. One way we visualize specs’ total longs and shorts in
relevant context is to consider them relative to their own
past-year trading ranges. That reveals whether substantial
gold-futures selling or buying is more probable soon.
That
latest-reported June 8th CoT saw total spec longs and shorts running
34% and 52% up into their 52-week trading ranges. The most-bullish
near-term setup for gold is 0% longs and 100% shorts, revealing
likely selling exhaustion leaving room for nothing but buying.
Since specs’ longs usually outnumber their shorts by several-plus
times, those upside bets on gold are proportionally more
important for driving its price.
So
speculators had far more room to buy than sell even before this
recent gold carnage. And that was absolutely driven by gold-futures
selling. How can we know at this point? Gold’s much-larger
longer-term driver is investment demand, which dwarfs spec
gold-futures trading. But since it isn’t leveraged, it rarely
bullies gold’s prices around as violently as amplified gold
futures. This recent sharp selloff reeked of them.
While comprehensive global-gold-investment-demand data is only
published quarterly, a
high-resolution
daily proxy is the combined holdings of the leading and dominant
GLD and IAU gold exchange-traded funds. Between that latest June
8th CoT and gold’s Fed-day plunge this Wednesday, GLD+IAU holdings
actually climbed 0.6%! Builds in these reveal stock-market
capital flowing into gold, or investment buying.
That
very day the latest Fed dots Powell warns against showed two
potential rate hikes at least a couple years down the road, GLD and
IAU experienced 0.1% and 0.2% holdings builds. So the American
stock traders often dominating global gold investment demand weren’t
selling gold-ETF shares faster than gold was being hammered by
futures selling. On the contrary, they were doing slight buying as
gold plunged.
No
significant GLD+IAU draws guarantees gold’s recent plunge was
gold-futures-driven. And there’s no doubt the next couple CoT
reports covering this pre-FOMC week and the hawkish-dots reaction
since will confirm that in spades. And that had to be a big spec
longs dump, and likely sizable new shorting, to hammer gold so
sharply lower. That means spec gold-futures positioning is now
way more bullish post-purge!
Speculators’ futures puking since June 8th had to have left their
total longs way lower than that 342.6k contracts. They are probably
now well under uptrend support, maybe even down to a new multi-year
low. That would imply these leveraged traders’ gold-futures
liquidation is exhausted, leaving room for nothing but
buying. Like usual, that should soon catapult gold sharply higher
in a proportional V-bounce recovery.
And
total spec shorts are also likely now much higher than June 8th’s
97.8k contracts. That day’s overall speculator positioning at 34%
longs and 52% shorts has to have shifted much closer to that
most-bullish-possible near-term setup for gold of 0% longs and 100%
shorts. I can’t wait to see how close it got, how many longs specs
puked out and shorts they piled into. I’ll cover that in depth in
our upcoming newsletters.
So
speculators’ gold-futures setup almost certainly now looks
super-bullish for gold, with that Fed-dots scare squeezing out
the great majority of potential selling. Had spec longs been really
high before their crazy overreaction to two potential rate hikes
over two years from now not officially forecast by the FOMC, we
would have to be wary of more selling. A great example of that
happened in March 2020’s stock panic.
With
government COVID-19 lockdowns threatening to unleash economic
devastation, traders rushed into the US dollar as a safe haven.
That unleashed huge gold-futures selling, collapsing gold a brutal
12.1% lower in just eight trading days! Gold was particularly
vulnerable then because total spec longs soared to an all-time
record high of 473.2k contracts a few CoT weeks earlier. I
warned about that
before gold plunged.
Generally we should be wary of major cascading gold-futures selloffs
when spec longs exceed 400k, a threshold I call the
gold-futures-selling overhang. That was exceeded in early
January 2021, before heavy gold-futures selling unleashed an
extended gold
correction. But way down at just 342.6k contracts before this
latest gold carnage, there simply wasn’t enough potential selling
fuel to sustain a serious gold selloff.
So
odds are great gold will soon bounce sharply higher as speculators’
kneejerk gold-futures purging quickly exhausts itself. Like Powell
himself often warns, the dot plot has proven notoriously inaccurate
at forecasting future federal-funds-rate levels. 2023 is still
years away, and the FOMC lacks the courage to hike rates anyway if
that drives major stock-market selloffs. That’s a serious risk with
today’s bubble
valuations!
And
since that March 2020 stock panic, the Fed has frantically printed
trillions of dollars of new money to stave off a
depression-triggering serious stock bear. In only 15.0 months
since, the Fed’s balance sheet has mushroomed a staggering 84.4% or
$3,640b! This profligate Fed has nearly doubled the
US-dollar supply, which is why price inflation is soaring
everywhere. That is really bullish for gold prices going forward.
The
global gold supply only grows on the order of 1% annually from
mining, so vastly-faster monetary inflation leaves far more dollars
chasing gold and bidding up its price. And even if the FOMC musters
the fortitude to start slowing its $120b of monthly QE bond
monetizations late this year, that implies at least another $1.4t of
new dollars conjured into existence by the end of 2022! That
monetary excess is gold-rocket-fuel.
So
it doesn’t make much sense to worry about this week’s
ridiculously-overdone gold-futures purge on that
notoriously-inaccurate dot plot. That was so violent it had to
shake out most of the remaining likely gold-futures selling. That
leaves room for massive gold-futures buying to soon catapult
this metal sharply higher. This hawkish-dots gold anomaly is a
great opportunity to deploy capital in
beaten-down gold
stocks!
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The
bottom line is this week’s Fed-sparked gold-futures purge was
ridiculous and unsustainable. The FOMC didn’t warn about QE
tapering or imminent rate hikes, maintaining its $120b of monthly
bond monetizations and ZIRP indefinitely. Instead just a third of
top Fed officials said they expected slightly-higher
federal-funds-rate levels way out in 2023! And the Fed chair warned
to take dots “with a big grain of salt.”
The
dot plot is not official, it is not a forecast, and has proven
notoriously inaccurate at predicting future FOMC moves. Futures
speculators, both on the US-dollar and gold sides, should know
better. And that hawkish-dots gold-futures puking erupted from
already-low spec-longs levels, so it should quickly exhaust itself.
That brutal purge left gold far more bullish, leaving gold-futures
traders big room for mean-reversion buying. |