Gold
spent the better part of 2021 consolidating sideways, which eroded
most bullish sentiment. With little upside momentum to chase,
investors largely abandoned this leading alternative asset. And
gold-futures speculators freaked out and fled multiple times on
Fed-tightening fears. While all that left gold in the doghouse,
this metal’s technicals are wound tight in a gigantic bullish
pattern implying big gains coming.
To
successfully game where markets are likely heading, you have to
first understand where they have been and why. Trending price
action is a causal chain, where events A, B, and C directly
lead to D. My essays over the last couple weeks provided that
essential context, extensively exploring and analyzing what has
happened in gold over this past half-year. This metal’s vexing
grind in that span is fully-explainable.
Periodic bouts of
heavy-to-extreme gold-futures selling erupted on speculators’
fears of Fed rate hikes and slowing quantitative-easing money
printing. Those violent pukings slammed gold sharply lower, which
really damaged sentiment. That left
investors
increasingly apathetic, unwilling to deploy capital into the
yellow metal. Even though gold recovered between futures selloffs,
upside momentum was sorely lacking.
With
investors not interested enough to return while gold-futures
speculators endlessly worried about Fed tightening, gold couldn’t
make much headway. That has left it deeply out of favor, as traders
are a what-have-you-done-for-me-lately lot. We humans tend to
greatly overweight the present, extrapolating current conditions way
out into the future. Recently gold has looked doomed to grind
sideways-to-lower indefinitely.
But
the major trend shifts that earn smart contrarian traders fortunes
are never apparent with a myopic short-term focus. Much-broader
perspective is necessary to see when probabilities favor key
transitions from uplegs to corrections and vice versa. Layered on
top of gold’s core fundamental analysis from my last couple essays
is a gigantic bullish technical pattern. It is winding
ever-tighter, portending a major breakout.
Gold
felt awesome in 2020 because it blasted 25.1% higher, and bearish in
2021 because it has drooped 5.7% year-to-date. But prevailing gold
levels are actually better this year than last year, as gold
averaged $1,798 so far in 2021 compared to $1,773 in 2020! Gold has
largely spent this year consolidating high, digesting its
huge gains from last year. That consolidation has formed a huge
bullish pennant formation.
Visualize a flagpole off of which a triangular flag is billowing,
like at a renaissance festival. This updated gold-futures chart
from last week reveals that pattern at a very-large scale. Gold
rocketed higher in two mighty 42.7% and 40.0% uplegs peaking in
2020, which is the flagpole. All the sideways-grinding price action
since gold crested at an all-time high of $2,062 in early August
2020 is the pennant. This is one big flag!
Gold’s enormous pennant is defined by downward-sloping resistance
and upward-trending support lines converging at similar angles.
That resistance zone was initially formed during gold’s healthy
correction after soaring to
crazy-overbought
levels in summer 2020. Then it was solidified in two subsequent
upleg attempts into June 2021 and November 2021. Gold has
suffered lower highs over the past 16.5 months.
Traders’ market perceptions are always filtered through their
biases. So anyone bearish on gold, which is the vast majority
today, sees these lower highs as technical evidence gold is
weakening. Why bother with it if it can’t make any material headway
over such a long span? New bull highs attract in countless new
traders, and gold hasn’t achieved any of those since August 2020.
That has left this asset deeply out of favor.
Gold
indeed languished in an
expected
correction downtrend until early March 2021. Then it carved a
major double-bottom and a solid young upleg got underway. That
13.5% surge higher over 2.8 months was way too big and lasted much
too long to be a countertrend rally within a correction. It was the
real deal, this secular gold bull’s next upleg. Unfortunately a
hawkish Fed prematurely killed it in mid-June.
Extreme gold-futures selling
erupted on Fed-rate-hike fears, after top Fed officials’ individual
outlooks on future federal-funds rates showed maybe two
quarter-point hikes way out into year-end 2023. The resulting 5.2%
gold plunge in just three trading days also slayed mounting bullish
sentiment. With gold-futures speculators selling periodically since
and gold investors missing in action, gold has mostly drifted
sideways.
But
fascinatingly despite that vexing high consolidation sapping all
enthusiasm, gold has still carved a series of higher lows.
That 9.5-month-old rising lower support line is the bottom border of
this colossal pennant formation. Doesn’t it look like a symmetrical
triangular flag hanging off the flagpole of last year’s huge gold
surge? This big technical formation seems to have real power, as
seen after the latest FOMC meeting.
Gold
was right at lower support heading into this recent mid-December
FOMC decision. Had a sizable selloff erupted in the Fed’s
aftermath, it would have jeopardized this pennant’s integrity. And
after gold had plummeted 5.2% right after the mid-June FOMC meeting
implied two distant-future rate hikes, how would it fare with the
Fed expected to wax very hawkish? Gold-futures speculators were
nervous that day.
Gold’s only short-lived support breakdown came after the
late-September FOMC meeting, when that so-called dot plot of
individual Fed officials’ federal-funds-rate projections barely
pulled forward the first rate hike to 2022 and left one in 2023.
Traders expected last week’s new dot plot to double that to two rate
hikes each in both years. Fed officials are worried about the
raging inflation
their money printing unleashed.
Bearishly for gold, this latest dot plot proved way more hawkish
than forecasts. Instead of doubling the rate-hike outlook, it
literally tripled to fully three hikes projected in 2022
followed by another three coming later in 2023! If there was ever
an excuse for speculators to puke out another huge slug of
gold-futures selling, that was it. Gold had collapsed in mid-June
going from zero to two hikes, and this was two to six!
Yet
instead of freaking out, speculators accepted the looming
Fed-rate-hike cycle and started buying gold futures. Over the
three trading days including the FOMC, gold actually rallied 1.6%!
That stark contrast to mid-June’s plunge on a far-less-hawkish dot
plot was momentous. It happened because specs had already done most
of their gold-futures selling
in anticipation
of a hawkish Fed, exhausting their capital firepower.
That
kept gold’s giant pennant intact on a high-risk day where a
serious technical breakdown could’ve easily occurred. This strong
formation has survived plenty of challenges, increasing its odds of
running to completion. And that’s coming soon, with gold’s major
support and resistance lines converging to wind the yellow metal
ever-tighter technically. Sometime in this coming quarter, a major
breakout will be forced.
And
it is very likely to prove an upside one. In technical analysis,
pennants are part of a larger group of chart formations called
continuation patterns. That means prices usually exit these moving
in the same direction they entered. This secular gold bull’s
huge surge higher to new records in 2020 was the flagpole for this
pennant. So its breakout is likely to be another major gold upleg,
fulfilling this giant continuation pattern.
These wound-up technicals are very bullish for gold. Technical
analysis often works because enough traders follow it and buy or
sell accordingly to make it something of a self-fulfilling
prophecy. But I’ve always figured chart price patterns are
secondary, that underlying primary fundamental drivers need to agree
with them. Gold’s big tightening pennant is confirmed as bullish by
speculators’ gold-futures positioning.
Again with bored investors not the least-bit interested in gold,
specs’ hyper-leveraged gold-futures trading has dominated this
metal’s price action since mid-June. Their total longs and shorts
as disclosed in the weekly Commitments-of-Traders reports are
rendered in this chart. Over the past several years, specs’ longs
have been trending higher and shorts have been drifting lower on
balance. This is normal bull behavior.
The
longer secular bulls persist, the more likely traders are to bet
with them and not against them. So speculators’ upside bets on
gold or longs gradually climb as gold bulls mature, while their
downside bets or shorts slowly shrink. Note above that spec longs
are relatively-low in their secular uptrend while spec shorts are
right at the upper resistance of their secular downtrend. This
positioning is very bullish for gold!
When
longs are relatively-low, specs have far more room to buy gold
futures than to sell them. They’ve already mostly exhausted their
likely selling. And when shorts are relatively-high, specs have way
more room to buy to cover than doing more short selling. So
major gold-futures buying is much more likely in coming months
than more bouts of heavy-to-extreme selling. And that will catapult
gold sharply higher.
Case
in point was the recent fast gold surge into mid-November. Starting
with the early-November FOMC meeting where it formally launched QE4
tapering, specs flooded back into gold-futures longs. In the next
two CoT weeks those soared a huge 55.6k contracts or 15.6% higher!
That blasted gold up 3.5% in that short span. Another gold surge of
that magnitude or larger would drive that pennant upside breakout.
But
what would motivate gold-futures speculators to aggressively buy
with a new Fed-rate-cycle looming? Several major gold-bullish
factors are aligning, which I’ll detail in next week’s essay. In a
nutshell they are epic Fed money printing continuing to stoke raging
inflation, gold tending to fare well during Fed-rate-hike cycles,
and Fed rate hikes weighing heavily on overvalued stock markets
which boosts gold investment demand.
The
Fed has ballooned its balance sheet by a terrifying 110.6% or
$4,598b in merely 21.6 months since March 2020’s pandemic-lockdown
stock panic! Effectively more than doubling the monetary base
is why inflation is out of control. Relatively-more money is
competing for and bidding up the prices on far-slower-growing goods
and services. Gold is the ultimate inflation hedge, its gains well
outpacing monetary excesses.
Fed-rate-hike cycles are no threat to gold, contrary to futures
specs’ paranoia. During the last Fed-rate-hike cycle where the
federal-funds rate
was raised nine
times between December 2015 to December 2018, gold powered 17.0%
higher during its exact span. During the
eleven previous
Fed-rate-hike cycles since 1971, gold averaged great 26.9%
absolute gains! Higher rates weigh on stock markets, not the
yellow metal.
And
today’s lofty record Fed-QE-levitated stock markets are very
precarious trading at dangerous bubble valuations. That
starts at 28x earnings, twice the historical century-and-a-half
fair-value at 14x. Heading into December, the S&P 500 stocks
averaged bubblicious 32.7x trailing-twelve-month price-to-earnings
ratios! As stock markets roll over on Fed tightening, gold will
regain favor as the best portfolio diversifier.
I’ll
greatly expand on gold’s coming turn to shine next week, but for now
realize major drivers of gold-futures buying are coming. And once
that pushes gold prices high enough for long enough, investors
will start to return with their vast pools of capital to chase
gold’s upside momentum. So major fundamental justifications exist
for gold’s giant pennant continuation pattern to follow precedent
and break out to the upside.
And
gold’s next major upleg will likely carry it to new record highs.
Including that recent one truncated by hawkish Fed-official rate
projections in mid-June, this secular gold bull has seen five
uplegs. They averaged big 29.3% absolute gains. Assuming
gold’s late-September low after the FOMC pre-announced QE4 tapering
holds, a merely-average sixth secular-gold-bull upleg would propel
this metal up near $2,231.
But
given this super-bullish fundamental backdrop for gold including
unprecedented inflation, this next upleg ought to grow even
larger. So the coming upside breakout from gold’s massive bullish
pennant pattern is a really-big deal. It will galvanize interest in
this leading alternative asset, fueling major self-feeding
gold-futures buying which will start attracting back investors.
Gold is wound tight and ready to surge.
The
biggest beneficiaries of much-higher gold prices ahead are the
fundamentally-superior
mid-tier and
junior gold stocks. They rallied sharply with gold into
mid-November, but were dragged back down to their stop losses by a
bout of heavy gold-futures selling. Our stoppings averaged out near
neutral, mostly recovering our capital. So we’ve been aggressively
redeploying buying back in low in our weekly newsletter.
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The
bottom line is gold technicals are wound up in a massive pennant
formation. It is well-seasoned, with upper resistance running back
to August 2020 and lower support to March 2021. These major lines
will converge in the next several months, forcing a breakout.
That’s highly likely to be an upside one, as pennants are
continuation patterns and gold entered this one powering higher.
These technicals are very-bullish.
And
they are supported by strong fundamentals. Specs’ gold-futures
positioning has far more room for buying than selling. That should
be catalyzed by raging inflation from the Fed’s epic money printing,
and bubble-valued stock markets rolling over on the Fed’s looming
rate-hike cycle. As gold powers higher on mounting
portfolio-diversification demand, investors will increasingly return
sustaining and growing its gains. |