The
gold miners’ stocks continue to vex contrarian traders, toying with
herd psychology. They blasted higher to a key technical breakout in
early November, building bullishness. But that was soon dashed on
the rocks as they plunged into late November, fueling bearishness.
While such schizophrenic action seems capricious, it is all driven
by how gold-futures speculators are trading to bully around the
yellow metal.
Gold
miners’ earnings amplify changing gold prices, making their stocks
leveraged plays on the metal they produce. That leaves gold
stocks overwhelmingly-dependent on gold’s fortunes. Traders flock
into this little high-potential sector when they expect higher gold
prices. That bullish psychology comes from upside momentum in this
leading alternative investment. When gold is climbing, traders want
to own its miners.
But
the other side of that sentiment coin is traders flee gold stocks
when gold weakens. The more they fall, the more they are shunned.
Gold stocks are forever slaved to gold, exaggerating its price
trends. So gaming gold miners requires understanding what is
moving gold and why. Investment capital flows are its dominant
primary driver. But when investors are sitting on the sidelines,
gold-futures speculators take over.
While these futures specs command vastly less capital than the
investors, they punch way above their weights in gold-price
impact. That’s mostly due to the extreme leverage inherent in
futures trading. Each gold-futures contract controls 100 troy
ounces of the yellow metal, worth $180,000 at $1,800 gold. Yet this
week traders are merely required to keep cash margins in their
accounts of $7,500 per contract.
That
enables them to run maximum leverage of 24.0x, which is actually on
the lighter side historically! Still that greatly amplifies the
influence of gold-futures trading on gold prices. Each dollar
deployed at that limit has 24x the price impact on gold as a
dollar invested outright! Adding to futures’ big influence over
gold, its world reference price is that gold-futures-trading-driven
one. That really affects popular psychology.
Gold
stocks’ wild ride in recent months was almost entirely driven by
gold-futures trading blowing gold to and fro. This high-potential
sector is almost untradable if you aren’t watching specs’
gold-futures action! That is what moves gold prices when investors
are missing in action. And gold stocks simply amplify the
prevailing trends in the metal they mine. So spec gold-futures
trading is often the key to gold-stock fortunes.
The
leading gold-stock benchmark and trading vehicle remains the GDX
VanEck Gold Miners ETF. It contains the world’s biggest gold
miners, which recently finished reporting good
Q3’21 operational
and financial results. GDX has certainly had a wild ride in the
last several months, all attributable to how spec gold-futures
trading was affecting gold. Understanding those trends is essential
to gaming coming action.
GDX
fell sharply in September before rebounding strongly in October.
Then in November it surged again before collapsing! Those were big
moves that really altered herd psychology. But it is always
important to consider the recent price action that dominates popular
greed and fear in broader perspective. As this chart shows, the
gold-stocks have resumed grinding higher on balance after
suffering a major correction.
Price trends are best-understood by analyzing the news and events
driving them in chronological order. I’ve long framed the
analyses in our popular newsletters on the skeletons of how things
unfolded. Event A leads to B leads to C leads to D. If you don’t
understand A, B, and C, you’re going to have a tough time
anticipating D. The seeds for recent months’ gold-stock action
started to be sown in a mid-summer gold plunge.
Since my past essays have covered gold-futures speculators’
anticipatory
QE4-taper tantrum extensively, we’re going to start at the tail
end of it today. GDX was recovering in early September, rallying
back to $33.29 which was right near its key 50-day moving average.
Things were looking up in gold-stock land after a rough summer. But
gold selling flared again after a big US retail-sales beat was
considered Fed-hawkish.
Over
the next few weeks into late September, gold plunged 5.6% to
$1,725. The driver was heavy gold-futures selling on
Fed-tightening expectations, which fueled a parallel major 2.5%
surge in the US Dollar Index. Gold-futures speculators often watch
the dollar for trading cues. The extreme leverage they run
necessitates a myopic short-term focus. At 24x, a mere 4.2% adverse
gold move wipes out 100% of capital risked!
Unfortunately spec gold-futures positioning is low-resolution data
only published weekly. The numbers from the famous Commitments of
Traders reports only show Tuesday closes. So gold-futures action
has to be matched to the nearest Tuesdays around gold-price
swings. Over the closest several CoT weeks, the gold-futures
speculators sold 16.6k long contracts while catapulting up their
short-sold ones a big 29.1k!
That
added up to the equivalent of 142.0 metric tons of gold selling.
For comparison, the leading daily proxy for gold-investment capital
flows is the
combined bullion holdings of the dominant GLD and IAU gold
ETFs. During that same September span, they only contracted a tiny
5.6t. So that gold-futures selling forced gold 5.6% lower, which
GDX leveraged by 2.4x to an ugly 13.2% loss during that same span.
That
was right in the middle of GDX’s normal range for amplifying
material gold-prices moves of 2x to 3x. Gold finally bottomed then
reversed sharply higher again in late September soon after the Fed
declared its QE4 taper was imminent. When gold didn’t crater in the
wake of late-September’s FOMC meeting, gold-futures speculators
realized their taper-tantrum selling had already happened in
preceding months.
Obviously in hindsight that major reversal was a great time to buy
gold stocks. But realize virtually no one thought so then, as herd
sentiment was overwhelmingly-bearish. As humans we naturally tend
to overweight recent events psychologically, extrapolating them
continuing to run indefinitely. Succumbing to that instinctive
behavior makes it impossible to buy low then sell high, so it must
be surmounted with perspective.
This
comes from understanding that chronological chain of market events,
the endless interplaying of causes and effects. Gold stocks mirror
and amplify gold, which is driven by hyper-leveraged gold-futures
trading if investors aren’t playing. The gold-futures guys in turn
closely watch the US dollar’s fortunes and what the Fed is likely to
do next. All that often overrides gold miners’ fundamentals, they
don’t trade in a vacuum.
The
contrarian traders who deployed in gold stocks in late September
when they were deeply out of favor were soon rewarded for
their courage. Over the next four weeks or so into late October,
GDX surged to a 15.7% mean-reversion rebound. Gold’s own 4.7%
bounce in that span so encouraged gold-stock traders that GDX
amplified gold’s move by a great 3.3x! Gold was powering higher
again on big gold-futures buying.
In
the four-Cot-week span matching that gold rally, speculators bought
22.7k long contracts while buying to cover another 26.8k short
ones. That added up to the equivalent of 154.0t of gold buying, a
lot in such a brief period of time! The Fed-tightening-goosed USDX
weakened 0.6% during that span, emboldening the gold-futures specs.
Investors didn’t help, actually selling a bit with GLD+IAU holdings
slumping 14.6t.
All
gold-stock uplegs flow and ebb, taking two steps forward before
retreating one step back. A pullback emerged in late October, when
GDX plunged 5.7% in just over a week. Gold-stock traders were
spooked by a much-milder 1.0% gold pullback, which GDX was
amplifying an extreme 5.7x! Gold’s rebound took a pause because
speculators’ gold-futures buying did. Their buying and selling
netted out to nothing that week.
They
sold a modest 4.3k longs, which were fully offset by 4.5k of
short-covering buying. That added up to the equivalent of just
+0.7t, essentially zero. GLD+IAU holdings didn’t budge either,
edging up a trivial 0.3t during that CoT week. Without any
identifiable buying, gold’s young upleg faltered. That
sapped GDX’s strong upside momentum, forcing a sharp pullback. Not
surprisingly the USDX was 0.3% stronger that week.
But
gold-futures buying soon reignited with a vengeance, mostly on
momentum-chasing. At 10x or 20x leverage, every one percent
gold rises drives massive 10% or 20% amplified gains. Rather
ironically the catalytic event was that early-November FOMC meeting
where the Fed finally formally announced QE4 tapering was starting.
The same speculators who feared that for months rushed back into
gold futures!
After gold once again didn’t collapse on the Fed merely slowing
its epic
money-supply growth, buyers flooded in. Over the next
week-and-a-half or so, gold blasted 5.3% higher to $1,866. That was
back up to mid-June levels before an FOMC meeting implying
distant-future rate hikes kicked off the summer gold selloff. That
early-November gold resurgence shot GDX 10.7% higher in a
slightly-offset span, for 2.0x leverage.
Yet
again this was all driven by spec gold-futures buying, which proved
utterly-enormous. During that two-CoT-week span closely matching
gold’s mid-November surge, speculators added a colossal 55.6k
long contracts! Anything over 20k in a single CoT week is huge,
and those two ran +34.2k and +21.4k. That was partially offset by
7.9k of new shorting. That netted to the equivalent of another
148.2t of gold buying.
Interestingly the US Dollar Index surged 1.3% during this latest
gold-rally span. Specs were so caught up in chasing gold’s
upside momentum that they ignored the dollar strength! But
unfortunately gold still hadn’t climbed high enough for long enough
to convince investors to return. GLD+IAU holdings slipped a slight
3.5t during that span. Major gold uplegs are three-stage affairs,
and the third stage wasn’t kicking in.
Normally gold uplegs are born in deep oversold lows when
gold-futures specs buy to cover their profitable short contracts.
Gold surges on that, forcing other shorts to quickly cover or face
catastrophic leveraged losses. Those sharp gains soon convince
other speculators to ride gold’s newfound upside momentum by buying
leveraged longs. But that stage-one short covering and stage-two
long buying are just triggers.
While the gold-futures speculators wield outsized influence on gold
prices, their capital is very finite. It is investment flows that
fuel major gold uplegs. But they only ignite if that initial
futures buying drives sufficiently-big and persisting gains to look
sustainable. Only then will this crucial stage-three investment
buying take the baton. That can run for many months or years,
unlike futures buying which quickly peters out.
The
reason gold peaked in mid-November is spec long buying had
largely exhausted itself. Total spec longs soared to a
20.5-month high of 412.6k contracts! They could’ve forged higher
still, since their gold-bull uptrend resistance is way up over
500k. But anything over 400k forms a selling overhang, like those
heavy windblown-snow cornices hanging off mountain peaks. The right
catalyst can unleash selling anytime.
And
that came early on Thanksgiving week, when expected news somehow
triggered cascading gold-futures selling. With investors
still on the sidelines, all that mattered was spec gold-futures
trading. Gold plunged 2.3% the day Biden announced he would
renominate Jerome Powell as Fed chair. Even though that was widely
forecast, he was the less-dovish choice. So that triggered massive
gold-futures selling.
During the CoT week straddling that ugly gold down day, specs
dumped a colossal 30.8k longs which was about a third offset by
buying to cover 11.1k shorts. Together that added up to the
equivalent of 61.3t of gold selling. Investors didn’t flee in
sympathy, forcing an impressive contrary 16.4t build in GLD+IAU
holdings in that CoT week. That gold-futures puking got the
downside-momentum flywheel spinning.
The
0.6%-stronger USDX didn’t help, exacerbating the necessary
rebalancing selling in gold futures after upside bets got
overextended. So from mid-November to the middle of this week, GDX
plunged a rather-sharp 11.6% on a 4.4% gold drop. That was 2.7x
downside leverage to gold, the higher side of normal. That just
slammed GDX back below its 50dma, unwinding the earlier breakouts
above there and its 200dma.
All
this recent exciting-and-frustrating gold-stock price action, GDX
surging then retreating then surging again then plunging, resulted
from speculators’ gold-futures trading. That’s why this is
super-important for all gold-stock speculators and investors to
closely follow. The new CoT report current to this Tuesday will be
published late Friday afternoon like usual. And it should help
reveal whether this selling is likely over or not.
Just
like specs’ gold-futures-buying firepower is limited by their finite
capital, so is their selling. If these hyper-leveraged traders have
dumped enough longs and added enough shorts in recent weeks, then
gold and thus gold stocks are bottoming. They will again
reverse sharply higher when some catalyst reignites gold-futures
buying. Specs’ collective futures trading is like a giant pendulum
swinging from extreme to extreme.
Gold-stock fortunes are again slaved to gold, which is again in turn
driven by speculators’ gold-futures trading if investors aren’t
active. The extreme leverage those specs run forces them to be
exceedingly-myopic, hanging on every word of Fedspeak and closely
watching the US dollar’s related spasmings. Successfully trading
gold stocks requires observing all that, understanding it as a
coherent chronological whole.
So
watching these key gold-stock drivers and weaving them all together
is the core focus of our popular newsletters. Every week and month
I analyze speculators’ latest gold-futures positioning per those CoT
reports, and what their trends likely portend. I closely track
identifiable gold-investment capital flows in those monster gold
ETFs, explaining them on a daily basis. All gold-moving news and
events are analyzed.
Every significant swing in this multi-year GDX chart can be
explained by gold price action driven by either spec gold-futures
trading or gold-investment capital flows via GLD and IAU. How long
their trends have been running, and the more or less overextended
they are, help game major tradable turning points like correction
bottomings and upleg toppings. That knowledge is necessary to fight
the herd to buy low then sell high.
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The
bottom line is gold-stock fortunes are heavily dependent on
speculators’ gold-futures trading. The extreme leverage in that
really bullies around gold prices, which miners’ stocks then
amplify. So gaming gold-stock trends requires closely watching spec
gold-futures positioning and what is motivating those traders to buy
and sell. All that must be expertly integrated into a coherent
chronological running analysis.
Gold
stocks surged higher in recent months fueled by huge gold-futures
buying. But when those upside bets on gold grew excessive, heavy
selling soon erupted to rebalance overall spec positioning. That is
what hammered gold stocks back lower in recent weeks. But
speculators’ gold-futures-selling firepower is very finite just like
their buying. The next couple CoT reports will offer key insights
on whether it is exhausting. |