Gold
just achieved a new nominal record close, its first in several
years! This pivotal technical milestone is super-bullish,
unleashing widespread interest in this leading alternative sector.
Traders love chasing upside momentum, and the financial media’s
enthusiastic coverage of new records returns gold to their radars.
The last time gold forged into record territory, this
self-feeding-buying dynamic fueled a monster upleg.
Fortunes can change fast in the markets. Just two months ago in
early October, gold plunged to $1,820 in a
violent breakdown
driven by heavy gold-futures shorting. That extended a
grating correction to 11.3% over 5.1 months, leaving gold deeply out
of favor. While bearishness exploded, the contrarian case for gold
was far more compelling. Right at that bottoming, I argued new
record highs weren’t far away.
“Gold’s last nominal record close was August 2020’s $2,062. Despite
the last couple weeks’ carnage, that is only 13.2% higher from here.
...gold’s latest plunge was driven by massive gold-futures selling,
leaving speculators’ positioning exceedingly-bearish. These
super-leveraged traders have probably about exhausted their capital
firepower available for selling.” That meant a major new gold
upleg was coming.
The
excessive spec shorts then “guarantees huge mean-reversion
short-covering buying is imminent, which will catapult gold sharply
higher.” That indeed soon came to pass, as just several weeks later
gold had blasted back up to $2,005! Then I analyzed
gold’s new major
upleg, pointing out record territory was much closer. “New
nominal record closes are merely 4.1% higher from here, which
is within spitting distance.”
Gold
had enjoyed some big daily rallies in mid-October on gold-futures
mean-reversion buying, thus “A few more up days like these will
start writing gold into the record book. That will change
everything for gold psychologically, starting to attract in legions
of new investors. They love chasing winners with strong upside
momentum.” Gold took a breather with a 3.4% pullback in early
November, then came roaring back.
Gold’s assault on records intensified on November 28th, when it
surged 1.3% to $2,040 on a usually-hawkish Fed governor waxing
dovish. That was a decisive 1%+ breakout above the
psychologically-huge $2,000 level, driving more sector interest and
bullishness. Then a few days later on last Friday December 1st,
gold blasted up another 1.7% to a $2,071 US close! Again dovish
Fedspeak was behind that strength.
That
day was top Fed officials’ last opportunity to talk about monetary
policy ahead of their mid-December FOMC meeting. Fed-imposed
blackout periods on speaking publicly start two Saturdays before
those Wednesday FOMC meetings. The Fed chair spoke at an Atlanta
college that day, but failed to push back against traders’ growing
expectations rate cuts are coming soon. Jerome Powell
sounded quite dovish at times.
Markets latched on to his comment, “The strong actions we have taken
have moved our policy rate well into restrictive territory, meaning
that tight monetary policy is putting downward pressure on economic
activity and inflation. Monetary policy is thought to affect
economic conditions with a lag, and the full effects of our
tightening have likely not yet been felt.” Futures-implied March
rate-cut odds doubled to 80%!
Just
a week earlier they had been running 10%, so Powell not sounding
very hawkish triggered a violent repricing in rates. That forced
the US dollar lower, helping ignite a big gold-futures bid
catapulting gold up to $2,071. That was gold’s first new nominal
record close since August 6th, 2020’s $2,062 fully 3.3 years
earlier! And gold’s young upleg was still merely up 13.8% in
1.9 months, on the smaller side of precedent.
Gold’s big surge back into record territory happened while overseas
markets were closed. So when they reopened late Sunday New York
time, frenzied momentum-chasing buying quickly bid gold way up
near $2,135! But that big-and-fast spike left gold short-term
overbought, so selling soon emerged forcing it down near $2,068
entering Monday US trading. That record close changes everything,
despite gold pulling back.
This
chart looks at gold technicals over the past four years or so. Gold
tried and failed to achieve new nominal records in early March 2022
and early May 2023. Those attempts formed a horizontal secular
upper-resistance line at $2,050. Along with rising lower support in
recent years, that formed a colossal ascending-triangle
technical formation. Breakouts above such classic continuation
patterns are very bullish.
This
ascending triangle’s resistance has been perfectly defined for
several years, but support suffered a serious breakdown in
mid-2022. While that hammered gold to a deep 2.5-year low, it was
a short-lived anomaly driven by unsustainable extremes. The
US Dollar Index had skyrocketed an extreme 16.7% in just 6.0 months
to an extreme 20.4-year secular high on the most extreme rate hikes
in the Fed’s entire history!
That
included four back-to-back 75-basis-point monsters, along with
record quantitative-tightening bond selling! Gold-futures
speculators watch the USDX for their primary trading cues, doing the
opposite. So the resulting gold plunge last summer was extreme and
guaranteed to soon unwind, thus I argued at the time that
Fed dollar/gold
shock was ending. Gold surged back up over support faster than
it had fallen below.
Since that extreme anomaly quickly reversed, gold’s secular support
is better defined by the four other major lows in recent years.
This is a textbook ascending triangle, slowly filling in over a long
secular time frame at a gigantic price scale. Last Friday’s
decisive upside breakout from its $2,050 upper resistance is a
huge deal. Investopedia’s excellent explanation of
ascending triangles in technical analysis explains why.
“Once the breakout from the triangle occurs, traders tend to
aggressively buy or sell the asset depending on which direction the
price broke out. ... Increasing volume helps to confirm the
breakout, as it shows rising interest as the price moves out of the
pattern. ... A profit target can be estimated based on the height of
the triangle added or subtracted from the breakout price. The
thickest part of the triangle is used.”
That
latter revelation is stunning for gold, as its ascending triangle is
so darned big. It was born with a massive range from about $1,650
to $2,050, or $400! That implies gold could challenge $2,450
before this breakout upleg runs out of steam. While that sounds
like a crazy-optimistic pipe dream, it is actually quite plausible
based on historical precedent. Gold’s last breakout to record highs
fueled enormous buying.
That
happened after March 2020’s pandemic-lockdown stock panic, which
slammed gold 12.1% lower. Note in this chart that anomalous
breakdown was very similar in profile and magnitude to mid-October’s
recent 11.3% one birthing today’s upleg. Gold bottomed in mid-March
2020, then forged back up into nominal record territory in early
April. While new records weren’t hit every day, gold ground higher
on balance.
Fully 83 trading days elapsed from that first record close to when
that gold upleg peaked, with only 30 of those seeing new records.
Yet those generated so much excitement and greed that investment
demand for gold just skyrocketed. Investors love chasing
winners, and nothing fuels frenzied fear-of-missing-out buying like
new records. The combined holdings of the mighty American GLD and
IAU gold ETFs reveal this.
Dominating global gold ETFs, they are the best proxy for world gold
investment demand. Incredibly in just 4.6 months, GLD+IAU holdings
soared a gargantuan 35.3% or 460.5 metric tons higher! That
fueled a mighty 40.0% gold upleg ultimately peaking at that last
record close of $2,062 in August 2020. And such huge gold uplegs
aren’t rare. The pre-stock-panic one before that blasted up 42.7%
before rolling over!
For
this current ascending-triangle-breakout target of $2,450 to be
reached, today’s gold upleg would only have to grow to 34.7% off
early October’s major interim low. While definitely big, this is
still considerably smaller than those last couple uplegs when gold
forged new record highs cresting in 2020. While $2,450 is
achievable, personally I’m more comfortable looking for a
conservative 25% upleg taking gold near $2,275.
From
its anomalous late-September-2022 low on that Fed-rate-hike-fueled
USDX moonshot to early May this year, gold enjoyed a strong 26.3%
upleg. For today’s young one to ultimately grow to 25%, 30%, or
maybe even monster 40% gains would again require big investment
buying. And there’s lots of room for that in GLD+IAU holdings
alone. Having given up on gold, investors have huge mean-reversion
buying to do.
In
mid-October, GLD+IAU holdings slumped to a deep 3.8-year secular low
of 1,254.2t. American stock investors had virtually zero gold
exposure. Exiting that month, those ETFs’ gold bullion was
worth $80.5b at $1,984 gold. That was a trivial 0.2% of the
combined market capitalization of the elite S&P 500 stocks’
$37,171.1b! So for all intents and purposes, American stock
investors had almost nothing allocated to gold.
Before the Fed’s extreme-rate-hiking anomalies last year, GLD+IAU
holdings were running a way-more-normal 1,625.8t in mid-April 2022.
That remained well under their record high of 1,800.5t in
mid-October 2020, a couple months after gold’s last record close was
achieved. But even just to mean revert back up to the former,
American stock investors would have to buy enough GLD and IAU shares
to fuel a 371.7t build!
That
much differential gold-ETF-share demand is right in line with the
huge buying seen during those monster 40%+ gold uplegs cresting in
2020. The earlier 42.7% one enjoyed a 314.2t GLD+IAU holdings
build, while the later 40.0% one had that huge 460.5t. Their
average is 387.4t, very similar to the 371.7t necessary to merely
mean revert back to early 2022’s pre-Fed-rate-hike bullion levels.
That is easily doable.
Heading into gold’s August 2020 peak, that ratio of the value of
GLD+IAU holdings to the S&P 500’s total market cap ran 0.4%. So it
doesn’t take a big shift in American stock investors’ gold
allocations to launch this leading alternative asset way higher.
Given the insane monetary inflation the Fed and other major central
banks injected since that pandemic-lockdown stock panic, gold
allocations should grow way bigger.
It
wouldn’t surprise me to see 1% to 2% before markets fully adjust.
From late February 2020 to mid-April 2022, the Fed expanded its
balance sheet a dumbfounding 115.6% or $4,807b in just 25.5 months!
That is the monetary base underlying the US money supply, explaining
the raging inflation since. With money more than doubled,
prices on most goods and services have soared proportionally to
reflect that deluge.
But
gold hasn’t fully normalized yet. In the weeks leading into that
March 2020 stock panic, gold was only running $1,675 at best.
Despite big quantitative-tightening bond selling since mid-April
2022 when the Fed started fearing the inflation monster it
unleashed, the Fed’s balance sheet is still 87.5% or $3,638b
above February 2020 levels. Gold would have to soar over $3,140
to proportionally reflect that monetary growth!
Again investors love chasing winners, so the longer and higher gold
powers the more attractive it gets to more investors. There’s
nothing more potent for fueling this virtuous circle of big buying
than new record highs and their extensive financial-media
coverage. The more gold rallies, the more records it achieves, the
more investors shift capital into it, the more its gains mount
making these capital inflows self-feeding.
And
it’s important to realize that last week’s new gold record is just
nominal, not adjusted for inflation. In
real
inflation-adjusted terms even using the intentionally-lowballed
US Consumer Price Index, gold’s all-time-record close was actually
$3,361 in today’s dollars in January 1980! So gold has at least
another $1,300 or so to run from here before finally achieving true
real records, its ultimate upside potential is vast.
While investment buying is the primary driver of major gold uplegs,
it’s not the only one. They are fueled by three distinct sequential
stages of buying, initially gold-futures short covering. That
propels gold high enough for long enough to trigger much-bigger
gold-futures long buying. Eventually that further boosts gold
enough to attract back investors, with their vast pools of capital
dwarfing the gold-futures speculators’.
As
analyzed in all our weekly and monthly subscription newsletters,
this young upleg’s stage-one short covering and stage-two long
buying remain far from exhaustion. So gold’s ongoing breakout to
more new nominal record closes can be driven for another month or
two solely on gold-futures buying. Investors will start
pouring in to chase those gains sooner or later, accelerating gold’s
upleg potentially to monster status.
The
biggest beneficiaries of gold’s record highs fueling big momentum
buying will be gold miners’ stocks, particularly
fundamentally-superior smaller mid-tiers and juniors. As analyzed
in my essay last
week, their latest quarterly results proved spectacular!
Lower mining costs combined with higher gold prices fueled huge
profits growth even before today’s gold upleg was born. Their
earnings really leverage gold upside.
During gold’s last record-momentum-fueled upleg soaring 40.0% into
August 2020, the benchmark GDX gold-stock index skyrocketed
134.1% amplifying gold’s gains by 3.4x! The major gold miners
dominating it typically leverage material gold moves by 2x to 3x.
But new gold records really attract outsized gold-stock buying, and
the smaller gold miners we have long specialized in tend to well
outperform the majors.
Our
newsletter trading books are currently full of great smaller gold
miners enjoying mounting unrealized gains. Yet most remain cheap
and great buys, deeply undervalued fundamentally and/or still
battered technically. Speculators and investors deploying before
investors start flocking back to gold en masse will earn the fattest
gains. If you enjoy my web essays, keep them coming and get
deployed by subscribing today!
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The
bottom line is gold just achieved its first new nominal record close
in several years! That came as a super-bullish upside breakout in a
massive secular chart pattern, portending much-higher gold prices.
Gold forging into record territory changes everything, generating
enthusiastic financial-media coverage fueling widespread bullish
psychology. That will increasingly attract back investors,
accelerating gold’s gains.
They
have virtually no gold portfolio exposure now, in an inflationary
world with money supplies still nearly doubled. Investors love
chasing winners, and the more records gold accrues the more they’ll
want to buy it. These virtuous circles of capital inflows as record
closes drive big investment demand fuel monster gold uplegs. And
the gold miners’ stocks soar as their metal powers higher, really
amplifying its gains. |