Gold
finally surged to new bull-market highs this week! Several years
after its last bull high, gold punched through vexing resistance
after the Fed continued capitulating on ever normalizing. This huge
milestone changes everything for gold and its miners’ stocks,
unleashing new-high psychology fueling self-feeding buying. With
speculators not yet all-in and investors wildly underdeployed, gold
has room to power much higher.
Gold
momentum has certainly been building for a major upside breakout.
Back in mid-April with gold still near $1300, I wrote an essay
describing the “Gold-Bull
Breakout Potential” and why it was finally coming. Then a
couple weeks ago with gold in the $1330s, I published another one
analyzing “Gold
Surges Near Breakout”. For several years higher lows had
slowly compressed gold ever closer to surging over resistance.
Today’s gold bull was first born back in mid-December 2015 the day
after the Fed’s initial rate hike in its just-abandoned
tightening cycle.
Gold’s maiden upleg was massive, rocketing 29.9% higher in just 6.7
months to $1365 in early July 2016! But that first high-water mark
has proven impregnable over the 3.0 years since. Gold tried and
failed to break out in 2017, 2018, and 2019, repelled near a $1350
Maginot Line.
While gold mostly climbed on balance, the lack of higher highs
really impaired traders’ view on this asset. New bull highs
generate enthusiasm, enticing capital inflows. When prices fail to
achieve new bull bests from time to time, traders’ interest wanes.
Gold was largely forgotten, even though it technically remained in a
bull market since there had been no 20%+ selloff. Psychology needed
new bull highs decisively over $1365.
While they were inevitable sooner or later here, I sure didn’t
expect them this week. June is peak summer doldrums, the
weakest time of the year seasonally for gold. And US stock markets
remain way up near recent all-time record highs, steeped in
euphoria. That has really
stunted gold
demand in recent years. So the odds favored gold’s long-overdue
bull-market breakout getting pushed later into July or August.
But
this metal was defying weak seasonals to inch inexorably closer. It
closed at $1340 on June 7th, $1342 on the 13th, and $1346 this
Tuesday the 18th. That was the day before the latest Fed decision.
The Federal Open Market Committee had really painted itself into a
corner. It had shifted dovish so hard in recent months that
traders’ expectations for a new rate-cut cycle starting seemed
impossible to meet.
Had
the Fed not been dovish enough, the US dollar would’ve surged
unleashing sizable-to-serious gold-futures selling. But amazingly
the FOMC managed to neither cut rates nor tease a rate cut at its
next meeting in late July, yet still convince traders it was
ready to cut. That masterful sleight of hand came in the quarterly
dot plot, the collective future federal-funds-rate forecasts of top
Fed officials. They were dovish.
Back
in late September before the flagship S&P 500 stock index plunged
19.8% in a severe
near-bear correction, the dots predicted 5 more rate hikes
including 3 in 2019 and 1 in 2020. After December’s 9th hike of
this cycle, the mid-December dot plot only moderated to 2 in 2019
and 1 in 2020. In the next dot plot in late March, this year’s
hikes were struck but 2020’s lone 1 remained. That led into this
week’s dot plot.
Traders were expecting almost 4 rate cuts over the next year
heading into this FOMC decision, which seemed like a bridge too
far. And it was! Top Fed officials’ neutral 2019 outlook of no
rate hikes stayed unchanged, no cuts were added. I’m surprised the
US dollar didn’t surge on that, indirectly hitting gold. But the
dot plot did eliminate 2020’s lone hike and pencil in 2 cuts
instead, which was a major dovish shift.
So
improbably in mid-June with the S&P 500 just 0.7% off late April’s
all-time-record peak, gold caught a bid. Even before Wednesday’s
2pm release of the FOMC statement and dot plot, gold held steady
near $1345. When the Fed headlines hit and currency traders
interpreted them as dollar-bearish and sold, gold shot up to $1354.
It gradually climbed from there to challenge $1360 by the end of
that US trading day.
Gold’s full reaction after major FOMC decisions often isn’t apparent
until the next trading day though, after Asian traders can react.
Their markets are closed when the Fed makes its announcements. As
Asian markets opened Thursday morning which was late evening
Wednesday US time, gold rocketed from $1358 to $1385 in about
an hour! Being a markets junkie, I always check overseas action
last thing before bed.
I
could hardly believe my eyes that night, and verified gold’s price
in multiple trading accounts. This gold bull was breaking out!
A decisive breakout is 1%+ beyond an old key level. That
translated into $1379 off July 2016’s seemingly-ancient $1365
bull-to-date peak. If those gains could hold into the US close on
Thursday, a decisive breakout would be confirmed. In early summer
with euphoric US stock markets no less!
These charts are current to Wednesday’s Fed-Day closes. In order to
write and proof these essays on Thursdays to publish on Fridays,
Wednesdays are the data cutoff. But as I pen these words on midday
Thursday, gold is still trading at $1385 in US markets. This
breakout looks like the real deal, the answer to contrarian
investors’ prayers. And speculators’ gold-futures positioning shows
room for more buying!
Because of the extreme leverage inherent in gold futures, their
traders wield
outsized influence over the short-term gold price. At $1350
gold, each 100-ounce contract controls $135,000 worth. Yet traders
are now only required to hold $3400 cash in their account per
contract. That equates to absurd maximum leverage of 39.7x. Each
gold-futures dollar has up to 40x the gold-price impact as a
dollar invested outright!
This
chart superimposes gold in blue over speculators’ total gold-futures
positions, with long upside bets in green and short downside bets in
red. Note that while gold has spent several years struggling with
that $1350 overhead resistance, it has carved major higher lows.
That has coiled gold into a giant tightening ascending-triangle
technical formation. These patterns are usually resolved with
strong upside breakouts.
Speculators’ collective gold-futures bets are reported weekly late
each Friday afternoon, current to the preceding Tuesday. So the
latest data available when this essay was published was as of June
11th, 6 trading days before the Fed’s shift into forecasting rate
cuts coming. Gold did rally 1.5% over the next
Commitments-of-Traders-report week ending this Tuesday the 18th, so
specs had to be buying gold futures.
But
this latest-available data still offers some great insights. Total
spec longs and shorts were running 299.1k and 97.1k gold-futures
contracts nearing the FOMC decision. Those shorts were actually at
a 14.3-month low, leaving big room for aggressive short selling. I
was worried heading into this week’s Fed meeting that it would
disappoint by not being dovish enough, igniting a dollar rally
triggering gold-futures shorting.
With
shorts so low, the risk of a short-term gold selloff remains high.
But high gold prices really stamp out any zeal traders have for
short selling gold futures at extreme leverage. At 39.7x, a mere
2.5% gold rally would wipe out 100% of the capital risked by short
sellers! So in the several months following recent years’ major
$1350 breakout attempts, spec shorts stayed low. They didn’t climb
until gold started falling.
Major gold uplegs have
three stages.
They are initially triggered by gold-futures short covering which
quickly exhausts itself after a couple months or so. Note above
that gold’s 15.9% upleg as of Wednesday was largely fueled by a
massive 153.7k contracts of short covering! That was necessary
after spec short selling soared to
all-time-record
highs late last August, forcing gold to the lows which birthed
this upleg.
After first-stage short covering, the second stage is fueled by
gold-futures long buying. So far that has been relatively minor,
just 41.0k contracts as of the latest CoT data. Again heading into
the FOMC, the specs were only long 299.1k contracts. That is much
lower than at past $1350-breakout attempts, which implies much more
room to keep buying from here. This is very bullish for gold
unless short selling flares up.
Back
in early July 2016 when gold rocketed to this bull’s initial $1365
peak, it was fueled by spec longs soaring to 440.4k contracts! That
was a whopping 141.3k or 47.2% higher than the latest read. The
next major $1350 breakout attempt came in early September 2017,
driven by total spec longs surging way back up to 400.1k contracts.
That too was 101.0k or 33.8% higher than recent levels leading into
the Fed.
In
late January 2018 that vexing upper resistance repelled another
valiant gold breakout attempt. Total spec longs crested at 356.4k
then. That was 57.3k or 19.2% higher than the latest data. So
assuming there wasn’t massive gold-futures long buying leading into
this Tuesday, there’s still room for gold-futures speculators to
buy another 57k to 141k contracts! Such big long buying would
propel gold well higher from here.
But
far more bullish than that is the potential stage-three
investment buying. While speculators have the leverage,
investors control vastly-larger pools of capital. All the stage-one
gold-futures short covering and stage-two gold-futures long buying
is just an ignition mechanism to entice investors to return. Once
they do, their big capital inflows can ignite strong virtuous
circles of buying that persist for months or even years.
The
higher gold climbs, the more investors want to own it. The more
they buy, the higher gold rallies. As investors love chasing
winners, nothing drives buying like new highs. New-high
psychology is easily the most-powerful motivator fueling big
investment buying. And gold investment remains very low even this
week as gold’s bull-market breakout neared. This is evident in the
leading gold ETF’s gold-bullion holdings.
The
American GLD SPDR Gold Shares dominates the gold-ETF world, acting
as the primary conduit for American stock-market capital to flow
into and out of gold. I discussed this in depth a couple months ago
in another essay on
stock euphoria
and gold. As of this Wednesday as gold surged back to $1360 on
that Fed capitulation from tightening, GLD held 764.1 metric tons of
physical gold bullion for its shareholders.
In
early July 2016 when gold first hit $1365, GLD’s holdings ran far
higher at 981.3t. That was 217.2t or 28.4% higher than this week’s
levels! At that next major $1350 breakout attempt in early
September 2017, GLD’s holdings were 836.9t or 9.5% above today’s
levels. And at January 2018’s attempt this key metric for gold
investment hit 849.3t, or 11.2% higher than this week. There’s lots
of room for investors to buy!
GLD’s holdings haven’t really soared since the first half of 2016
when gold rocketed 29.9% higher in this bull’s maiden upleg. That
was the last time new bull highs made investors excited about gold.
So their potential buying from here is much bigger than the
GLD holdings near $1350 breakout attempts suggest. The total GLD
build in that huge H1’16 gold upleg was 351.1t or 55.7%. Consider
that from recent lows.
In
early October GLD’s holdings sunk to a deep 2.6-year secular low of
730.2t. That was before the US stock markets started plunging in
Q4’s severe near-bear correction, so gold was deeply out of favor
with stock euphoria extreme. A similar total build of 350t from
there as gold returns to favor among investors would push GLD’s
holdings over 1080 metric tons. That would represent a 47.9% total
upleg build, not extreme.
And
American stock investors pouring enough capital into GLD to force it
to grow its physical-gold-bullion holdings to 1080t isn’t a
stretch. Back in early December 2012 fully 15.6 months after gold’s
last secular bull peaked, GLD’s holdings hit their all-time high of
1353.3 metric tons. That’s 77% higher than this week’s levels,
proving investors have vast room to shift capital back into gold
given their current low allocations.
One
way of inferring gold investment is looking at the ratio of the
value of GLD’s gold holdings to the total market capitalization of
all 500 elite S&P 500 companies. From 2009 to 2012 that averaged
0.475%, for an implied gold portfolio allocation near 0.5% for
American stock investors. That’s terrible, as every investor needs
a 10% allocation in gold and its miners’ stocks! But 0.5% is
still far higher than today’s levels.
When
the SPX recently peaked at the end of April, this ratio was running
around 0.12%. That’s only a quarter of that average from recent
years before gold fell deeply out of favor. Today investors are so
radically
underinvested in gold that their portfolio allocations need to
quadruple from here to merely return to quasi-normal levels!
So there’s room for great amounts of capital to return to gold,
driving it much higher.
Again my data cutoff for this essay was Wednesday’s close, before
gold started breaking out. At that point its gold bull to date was
29.9% higher at best as of several years earlier. The last secular
gold bull ran between April 2001 to August 2011. Over that
10.4-year span, gold powered a massive 638.2% higher! So
gold ultimately doubling or tripling from this bull’s birthing low
of $1051 certainly isn’t a stretch at all.
With
this gold bull finally breaking out after several years of vexing
failures, there are dozens of charts I’d like to share today. But
I’m settling with three so you don’t have to read a book. Again
June happens to be gold’s weakest time of the year seasonally, which
gold’s breakout surge is bucking. But despite the wonderful
emerging new-high psychology, gold’s advance isn’t particularly
outsized even for
summer doldrums.
This
chart looks at gold’s average summer performances in all modern
bull-market years. Each summer is individually indexed to
its final close in May, keeping gold price action perfectly
comparable regardless of prevailing levels. The yellow lines show
2001 to 2012 and 2016 to 2017. Last year’s summer action is
rendered in light blue for easier comparison. All these lines are
then averaged together into the red one.
That
reveals the center-mass drift trend of gold in market summers, which
include June, July, and August proper. Gold’s current 2019 summer
action is superimposed over all that history in dark blue. At least
as of gold’s $1360 Wednesday close following the FOMC, it was only
up 4.2% summer-to-date. That is still within the typical gold
summer trend of +/-5% from May’s close. This gold summer rally is
big, but not extreme.
As I
continue writing this essay early Thursday afternoon, gold is
trading near $1386. That is up 6.2% since the end of May. In the
summer of 2016 the last time gold was in favor and enjoying that
new-high psychology, it rocketed as high as +12.3% summer-to-date by
early July. So while early summers tend to be weak, gold can still
power higher in the right conditions. And a major bull-market
breakout is definitely it!
The
main beneficiary of higher gold prices is the gold miners. They
enjoy big profits leverage to gold as its price rallies
higher. Last week I wrote a whole essay on this “Gold-Stock
Upleg Mounting” where I went into leverage. The leading
gold-stock benchmark is the GDX VanEck Vectors Gold Miners ETF. In
mid-May I dug into its component gold miners’ latest
Q1’19 results,
revealing their current fundamentals.
The
GDX gold miners’ average all-in sustaining costs last quarter were
$893 per ounce mined. When compared to Q1’s average gold price near
$1300, at $1400 and $1500 gold the major gold miners’ profits would
soar 25% and 49% higher! So naturally gold-stock prices are
surging with gold’s awesome bull-market breakout this week. Here’s
the latest chart of gold-stock performance per GDX as of Wednesday.
Since late 2016 the gold stocks have been trapped in a giant
consolidation by gold remaining mostly out of favor with investors.
That manifested in GDX terms in a major trading range running from
$21 lower support to $25 upper resistance. On Fed Day as
gold rallied to $1360, GDX’s price climbed to $24.00 on close. That
was a 16.7-month high for this leading gold-stock benchmark, and
nearing its own breakout.
Early Thursday afternoon as I pen this essay, GDX has surged again
to $25. That’s right at that major resistance line of recent
years. A decisive breakout from here would portend gold stocks
finally being off to the races again. And that means enormous
gains for contrarian speculators and investors. In essentially
the first half of 2016 as gold blasted 29.9% higher, GDX skyrocketed
151.2% for huge 5.1x leverage!
As
of Wednesday this current gold-stock upleg per GDX only had 36.6%
gains. As gold’s own new-high psychology makes gold stocks
alluring again, they should soar dramatically from here. We
haven’t seen a real gold-stock upleg in several years. Just like
gold, when its miners’ stocks are powering to new highs buying
begets buying. Traders love chasing their gains which fuels a
glorious virtuous circle of capital inflows.
For
years traders have told me they were avoiding gold stocks until
something big changed. And there is nothing bigger for this
high-potential sector than new gold-bull highs. All the
stars are aligning for big gold-stock gains in the coming months,
with their technicals, sentiment, and fundamentals all looking very
bullish. This is not the summer to check out, but to do your
homework and get deployed in great gold stocks.
Unfortunately the major gold miners dominating GDX are
failing to grow
their production. That along with their large market caps means
smaller mid-tier
and junior gold miners with superior fundamentals will
enjoy far-better upside as gold climbs higher. While GDX should
amplify gold’s gains by 2x to 3x, that will be dwarfed by the epic
gains in better smaller miners. Major gold uplegs are a gold-stock
pickers’ market!
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks recovered from
selloffs, their unrealized gains were already running as high as
+108% on Wednesday!
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The
bottom line is gold is finally breaking out to new bull-market
highs! Somehow the FOMC managed to be dovish enough in its rate-cut
outlook this week to drive US-dollar selling, which unleashed major
gold buying. So gold blasted back over its bull-to-date peak from
several years earlier that had oppressed it for so long. Gold
hasn’t enjoyed new-high psychology since then, which is a
powerfully-bullish motivating force.
New
bull highs bring gold back into the limelight, making it attractive
again. Traders love chasing winners to ride their upside momentum,
and buying begets buying. Gold coming back into favor portends much
more upside to come, with room for big buying by both gold-futures
speculators and far-more-important investors. As their capital
inflows push gold to new bull-market heights, the gold stocks are
going to soar! |