Gold’s powerful breakout in recent months has proven remarkable.
But the reason isn’t its fast vertical surge to impressive record
heights. This breakout rally is exceptional because gold’s usual
drivers aren’t fueling it. Big demand outside of normal channels is
catapulting gold deeper into uncharted territory, which is really
bullish. That’s preserving capital firepower for buying from gold’s
regular speculators and investors.
In
the quarter-century I’ve been actively trading gold stocks and
writing contrarian newsletters, my focus has always been what’s
moving markets and why. That key causal chain from underlying
drivers to price action is essential to study and understand,
leading to more-profitable trading. Knowing the why markets move
leads to superior timing on the when of actually buying low and
selling high, increasing trading success.
Every major gold upleg during the past couple decades was fueled by
combinations of three sequential stages of buying from specific
groups of traders. The first is speculators covering gold-futures
shorts, the second is specs buying gold-futures longs, and the third
is investors returning to chase gold’s resulting upside momentum as
evident in major-gold-ETF holdings. But that model isn’t fully
explaining today’s upleg!
Initially it played out according to script. Gold bottomed at
$1,820 in early October after a gold-futures-shorting-driven
violent breakdown.
The very next morning I published an essay concluding “Their shorts
in particular are likely challenging major secular highs, which are
never sustainable for long. That guarantees huge mean-reversion
short-covering buying is imminent, which will catapult gold sharply
higher.”
That
indeed came to pass, with gold surging 13.8% into early December to
$2,071. That proved its first
nominal record
close in fully 3.3 years, likely to soon fuel frenzied
momentum-chasing
buying. Normal speculator stage-one and stage-two gold-futures
buying drove that, which was massive during that span. Only
released weekly, speculators’ aggregate gold-futures positioning
data is current to Tuesday closes.
Over
the eight Commitments of Traders weeks best matching gold’s initial
surge, specs bought to cover 65.0k short contracts and added another
71.5k long ones. That’s equivalent to 424.6 metric tons of gold
buying, a massive amount in a couple months! That averaged 17.1k
contracts of spec buying per CoT week, which is very large. Specs’
perfectly-normal early-gold-upleg gold-futures buying is evident in
this chart.
Gold’s sharp mean-reversion higher out of that oversold and
unsustainable early-October low resulted from big spec gold-futures
buying. Note that major reversal was first triggered then initially
driven by huge stage-one short covering, the red spec-shorts
line plunged! That propelled gold high enough for long enough to
attract in stage-two long buyers, which is evident in the green
spec-longs line soon surging too.
That
was all totally normal, the same short-covering-then-long-buying
dynamic that fuels most major gold uplegs. But just as gold was
finally reclaiming record territory, that spec gold-futures buying
was depleting. As this chart illustrates, both spec shorts and
longs have secular trading ranges. The lower support zone for the
former is around 95k contracts, while the upper resistance zone for
the latter is near 415k.
Generally buying peters out around those levels, indicating
speculators’ gold-futures buying firepower has been largely
exhausted. There aren’t many traders willing to bear the
extreme risks inherent in hyper-leveraged gold-futures trading, and
the capital they control is relatively small in the grand scheme.
So when this gold upleg was born, the distances between current
positioning and these zones revealed likely buying.
Back
in early October, speculators had probable room to buy to cover
79.4k shorts and add 150.2k longs before hitting 95k and 415k
respectively. That added up to 229.6k or 714.0t. But by early
December, all that buying had expended much of that upleg’s
potential, with specs only having another 14.4k shorts and 78.7k
longs left. That was 93.1k contracts or 289.4t, just 4/10ths
of that initial buying firepower remaining.
With
the majority of gold’s easy mean-reversion gains behind, speculators
took a breather. Both longs and shorts mostly drifted sideways in
December, so gold’s young upleg stalled out. Then during the first
six weeks or so of 2024, selling returned as the
US Dollar Index
surged on waning Fed-rate-cut odds. By mid-February
specs had short-sold 3.2k contracts while dumping 76.1k longs,
forcing a mild
4.2% gold pullback.
That
was normal gold-upleg behavior too, actually quite bullish
reloading spec
gold-futures longs for more buying! Those traders continued
modestly selling into late February, yet gold still bounced on large
short-covering buying slamming spec shorts back under their 95k
support zone. But leveraged speculators rushed back into
gold-futures longs with a vengeance as March dawned, after some
surprising Fedspeak.
On
March 1st gold blasted up 2.0% to $2,083, its first record close
since late December! That morning a Fed governor said he wanted his
central bank to monetize more short-term US Treasuries. While that
probably just meant shifting existing allocations, traders
interpreted it as hinting at new quantitative-easing money
printing. That prompted specs to add an epic 55.0k long
contracts during that straddling CoT week!
Anything over 20k in any single CoT week is huge, and that ranked as
the fourth-biggest long buying on record out of all 1,134 CoT
weeks since early 1999! Gold exited that maybe-QE-heralding CoT
week at $2,129 on March 5th. Over the next CoT week, specs
continued buying on balance adding another 22.1k longs offset by
10.6k of new short selling. That left gold at $2,156, with this
mounting upleg still behaving normally.
While gold breaking out decisively above its secular resistance zone
since mid-2020 near $2,050 was impressive, that price action wasn’t
unusual. Gold’s 19.9% upleg over 5.2 months at that point was
fully explainable by speculators’ gold-futures trading. Over
the next couple CoT weeks into late March, specs again sat on their
hands so gold drifted consolidating high. But then the
extraordinary suddenly emerged.
Over
three CoT weeks from March 26th to April 16th, gold rocketed 9.7%
higher to $2,388! That was nearly 4/10ths of gold’s now 31.2% total
upleg gains rapidly accruing in just 1/10th of that upleg’s span.
But the thing transforming this exploding breakout surge into
remarkable was gold’s normal drivers weren’t responsible.
Two of these last three CoT weeks have been reported, with the third
due out late Friday.
Those saw specs do small net buying of 7.4k contracts in the first,
then tiny net selling of 1.1k during the second. Gold shouldn’t
have moved much at all with so little gold-futures trading.
Amazingly in the last four reported CoT weeks current to April 9th,
total spec longs just edged up 0.3k while their shorts fell a small
6.0k. So there is absolutely no way gold should’ve soared 9.7% in
that span, it shouldn’t be possible!
This
stunning disconnect is very bullish on two fronts. First if the
gold-futures speculators weren’t in the driver’s seat like usual,
big demand is coming from other sources. Second since specs haven’t
had to do the heavy lifting catapulting gold higher in recent weeks,
their gold-futures positioning still remains quite bullish. At that
latest CoT, they still had likely room to short cover 11.8k
contracts and buy a large 83.6k longs.
That
is 296.8t in gold-equivalent terms, again over 4/10ths of the
initial buying firepower they had when this gold upleg was born
at $1,820 in early October! That was even marginally higher than
that room to buy had been in late December when gold was merely at
$2,068. Specs resuming buying and eventually exhausting their
probable buying will drive gold considerably higher still. That’s
remarkable after a 31% upleg!
The
great majority of the time, that spec gold-futures trading is gold’s
dominant primary driver due to its extreme inherent leverage.
Mid-week each 100-ounce contract controlled $237,200 worth of gold.
Yet these traders are only required to maintain $9,400 of cash in
their accounts per contract, making for crazy 25.2x maximum
leverage! Way up there a mere 4.0% gold move against bets wipes
out 100% of capital risked.
And
at 25x, each dollar deployed in gold futures commands 25x the
gold-price impact of a dollar invested outright! So spec
gold-futures trading is essential to follow. If you want to stay
abreast, I analyze every new CoT report in depth in our weekly and
monthly newsletters. I explain how these traders’ latest
gold-futures positioning compares to precedent and how it is likely
to affect gold-price action, which is crucial to know.
This
gold breakout surge is remarkable on this gold-futures disconnect
alone, but becomes much more so when considering gold’s stage-three
driver investment demand. Global gold-investment-demand data is
only reported quarterly by the World Gold Council, too
low-resolution to trade off of. But for many years, the combined
gold-bullion holdings of the world’s largest physically-backed gold
ETFs were a great proxy for it.
These of course are the dominant American GLD and IAU, which report
their holdings daily. When they are climbing stock-market capital
is flowing into gold, and vice versa. Despite gold powering up
31.2% since early October, this identifiable stage-three investment
demand has tumbled! Even if GLD+IAU holdings only reflect
gold demand from American stock investors, this disconnect is more
remarkable than futures.
Again major gold uplegs are initially fueled by gold-futures short
covering, then gold-futures long buying, and finally investment
buying. The first two stages drive gold high enough for long enough
to trigger the subsequent much-larger stages. So it is normal for
GLD+IAU-holdings toppings and bottomings to lag gold’s own.
But during this entire current gold upleg, those have continued
grinding relentlessly lower.
As
of midweek during gold’s 31.2% run over 6.4 months, GLD+IAU holdings
have inexplicably fallen 5.0% or 64.3t! Normally those
mirror gold uplegs, with American stock investors returning to gold
to chase its upside momentum as rallying attracts them back. This
anomaly is even more remarkable considering today’s upleg is the
first since a pair in 2020 to achieve new record highs, which spawn
self-feeding buying.
The
financial media loves covering record highs, and investors love
chasing them! The more new records gold achieves, the more it gets
covered and the more bullish that reporting on CNBC, Bloomberg, the
Wall Street Journal, and other major media sources. That greatly
builds awareness of gold’s record run, which attracts in many
traders not usually involved with this sector. This dynamic fuels
gold’s strongest uplegs.
Back
in 2020 two separate monsters crested at huge 42.7% and 40.0% gains,
far bigger than today’s! Both those were overwhelmingly driven by
American stock investors flooding into gold through differential
GLD-and-IAU-share buying. During that first upleg GLD+IAU holdings
soared 30.4% or 314.2t, and in the second they skyrocketed 35.3%
or 460.5t! Today’s 31.2% upleg is remarkable with no investor
buying yet.
At
least not from American stock investors, which control the biggest
pools of capital on the planet. I last wrote about this
dead
gold-investment demand in mid-January. I concluded then that
“Gold’s precipitous mid-2022 plunge as the US dollar skyrocketed on
monster Fed rate hikes really damaged gold psychology. So investors
mostly sat out gold’s huge mean-reversion bull now achieving new
records.”
And
“They started returning in mid-2023, but were distracted by stock
markets’ euphoric AI bubble.” I still think these are the main
reasons American stock investors haven’t yet returned. But they
almost certainly will as those factors fade. The more gold powers
into new-record territory, the more gold psychology is turning
bullish erasing mid-2022’s damage. And this
latest
stock-market bubble is really starting to roll over.
Between mid-January to late March, the flagship S&P 500 stock index
achieved 22 new record closes of its own! With general stocks
surging to the moon and sentiment euphoric, investors had no reason
to worry about prudently diversifying their stock-heavy portfolios
with gold. But during the few weeks since, the S&P 500 has
suffered a 4.4% pullback at worst midweek while gold blasted to
nine new record closes.
The
longer stock markets grind lower on balance while gold forges
higher, the more attractive it will grow to mainstream investors.
So I fully expect American stock investors’ gold demand to return
soon, for them to flood into GLD and IAU shares forcing big holdings
builds. They have massive room to reallocate back in, and
that normal stage-three buying will drive gold much higher. That’s
because of how ETFs work.
Physically-backed gold ETFs are designed to track the gold price.
But the supply and demand for their shares is independent of gold’s
own, always threatening to force their share prices to decouple.
The only way to ensure mirroring is to actively manage those ETFs’
shares outstanding, which shunts any excess supply or demand
directly into underlying gold bullion. ETFs are conduits into
gold for stock-market capital.
When
American stock investors are buying GLD and IAU shares faster than
gold is being bought, their share prices will accelerate ahead of
gold’s. In order to avert failing their mission, those ETFs’
managers issue sufficient new shares to offset that excess demand.
Then they immediately plow the cash proceeds from those share sales
into physical gold bullion held in their vaults. That real demand
accelerates gold’s gains.
Had
you told me a few months ago gold would soar vertically to many new
records despite little gold-futures buying, I would’ve been really
skeptical. If you added that American stock investors would also
flee as gold soared, I would’ve said no freaking way. For decades
nearly all major-gold-upleg price action was explainable by
combinations of spec gold-futures buying and differential
GLD-and-IAU-share buying.
Yet
here we are in a mighty upleg that is truly remarkable and
unprecedented! Gold is being driven sharply higher by other traders
outside of these usual suspects. The two leading candidates are
central banks and Chinese investors. The former’s buying has
accelerated dramatically in recent years, on fears of both a
US-dollar devaluation on the US government’s insane overspending and
weaponizing the dollar geopolitically.
According to the World Gold Council’s latest quarterly Gold Demand
Trends report, CB buying averaged 511.9t annually in the decade
ending 2021. But in 2022 and 2023, that doubled to 1,081.9t
and 1,037.4t! While the WGC’s Q1’24 GDT hasn’t been released yet,
anecdotal reports suggest CB buying this year remains very strong.
Major central banks have long been overallocated in the dollar and
underallocated in gold.
And
Chinese investors have been getting ravaged by a brutal stock-market
bear. The leading Chinese-stock ETF in the US is iShares MSCI
China. Holding large and mid-sized Chinese stocks representative of
China’s markets, that plummeted 62.9% from mid-February 2021
to early February 2024! During that bear, China’s authoritarian
government tried many aggressive interventions all failing to stanch
that bleeding.
While local stock markets burned, Chinese investors have also
suffered a multi-year bust in real-estate prices after a bubble.
And they can’t legally move their capital offshore to invest. So
gold looks fantastic to besieged Chinese investors, powering higher
in local yuan terms for major gains while everything else grinds
endlessly lower. The WGC’s upcoming Q1 data on Chinese consumer
gold demand should be telling.
Whoever is doing the buying, it hasn’t been gold-futures speculators
in recent weeks nor American stock investors for gold’s entire
upleg! That makes gold’s record breakout surge and 31%+ upleg so
far truly remarkable. The great thing is neither central banks nor
Chinese investors are likely to slow their buying anytime soon with
gold shining so bullishly. When late American investors join in,
gold ought to really fly!
With
those guys still ignoring gold, they also aren’t paying attention to
its miners’ stocks. They’ve started to surge and catch up with
gold, but have a long ways to mean revert higher yet. They were
battered to massively-undervalued and
deeply-oversold
lows in late February, incredibly anomalous relative to gold.
At best during gold’s 31.2% upleg, the leading GDX gold-stock ETF
has merely rallied an pathetic 33.0%!
Normally the major gold stocks amplify material gold moves by 2x to
3x, for upside
targets way higher than current levels. And the smaller
fundamentally-superior mid-tier and junior miners that we’ve long
specialized in at Zeal fare even better. With unrealized gains as
high as +72.6% midweek, our newsletter trades still have the
potential to double or triple before this gold upleg matures!
Big gold-stock gains are imminent.
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The
bottom line is gold’s recent breakout surge has proven truly
remarkable. The latest third soaring to many new records wasn’t
fueled by normal sources. The gold-futures speculators weren’t
doing much trading, while American stock investors have been selling
into gold’s entire upleg. That means big gold demand is surging
outside of usual channels, probably mostly from central banks and
Chinese investors.
This
portends even-higher gold prices ahead. All that major new buying
is likely to persist as surging gold fuels bullish sentiment. And
since gold-futures speculators haven’t been doing the heavy lifting,
they still have a large fraction of their original buying firepower
for this upleg remaining. Add on to that American stock investors
returning to chase gold’s upside momentum, and this powerful upleg
looks far from over. |