Gold’s young upleg just enjoyed a major upside breakout, bolstering
strong technicals and heralding a coming Golden Cross buy signal.
Investors have started aggressively buying gold again after
record-high stock markets distracted them. This gold upleg’s upside
momentum is really building, portending accelerating gains in coming
months. Yet sentiment remains poor, with traders still quite
bearish on gold.
Virtually no one is excited about gold these days. Mainstream
investors continue to ignore it like usual, while contrarians
largely expect a lackluster sideways grind at best. This apathy is
the natural result of gold’s recent consolidation between late
February and mid-April. With 6+ weeks seeing no net progress, there
was little to spark any enthusiasm. Thus gold gradually faded from
speculators’ and investors’ radars.
That’s exactly why consolidations and corrections exist, to
rebalance sentiment. At preceding interim highs, greed grows
too intense to be sustainable. So subsequent drifts or selloffs
bleed off this greed, replacing it with apathy or fear. That forces
out most marginal traders, paving the way for the next major rally
higher. That looks to have started just over a week ago in gold, as
evidenced by multiple indicators.
Gold
just surged to a major technical breakout above its key
200-day moving average, which greatly strengthens its latest
uptrend. Technically-oriented traders carefully watch price action
relative to this most important of moving averages. 200dma
breakouts following correction-magnitude selloffs are powerful buy
signals. So funds have already started moving serious capital back
into gold since that breakout.
Gold’s technicals and fundamentals are both very bullish,
contrary to the lingering bearish sentiment still dogging this
metal. Let’s start on the price-action side, since that is kindling
investment demand. This first chart simply looks at gold along with
its key moving averages during its young bull market birthed near
the end of 2015. Gold is now in this bull’s second major upleg, and
momentum is really building.
The
day after the Fed’s first rate hike in 9.5 years in mid-December
2015, gold plunged to a brutal 6.1-year secular low. Everyone
thought gold was doomed, convinced a zero-yielding asset simply
couldn’t compete in a higher-rate environment. Yet as I discussed a
few trading days before that initial Fed rate hike,
gold actually
thrives in Fed-rate-hike cycles historically! Gold’s young bull
since again proves this out.
Gold
started surging in mid-January 2016 as the US stock markets rolled
over into their worst selloff in 4.4 years, a mere 13.3% correction
in benchmark S&P 500 terms. Then in early February gold broke above
its 200dma decisively, like it just did again in April 2017. That
critical technical breakout sparked major buying by
speculators and investors alike, catapulting gold across that formal
+20% new-bull threshold.
That
first major upleg of gold’s new bull had ups and downs, like all
bull-market uplegs. A hawkish Fed crushed gold last May, but then a
major miss on monthly US jobs followed by the UK’s surprise
pro-Brexit vote blasted gold back up. Ultimately this metal surged
29.9% higher in just 6.7 months after being left for dead right
after the rate hikes started! But that left it very overbought,
drenched in greedy sentiment.
As I
warned last July right after gold peaked, it faced an ominous
record selling
overhang from the gold-futures speculators who dominate its
short-term price action. That portended a high consolidation at
best or correction at worst. These both accomplish the same mission
of restoring sentiment balance, but in different ways.
Consolidations bleed away greed more slowly with less pain,
corrections do it hard and fast.
For
several months last summer the easier high consolidation came to
pass, with gold drifting sideways from its uptrend’s resistance to
support. But futures speculators were still excessively long using
their usual hyper-leveraged bets. So when gold threatened to break
below key $1300 consolidation support, the futures stop losses
started tripping. That triggered more, igniting a cascading selling
futures mass
stopping.
That
rare event hammered gold back down to its 200-day moving average for
the first time since just after this new bull was born. 200dmas are
the strongest and most-important support lines within ongoing bull
markets, high-probability-for-success times to buy following normal
healthy corrections. So gold caught a bid and surged again into
early November, starting its next upleg. All this was typical
bull-market behavior.
The
Friday before the election, gold was back near $1305 on mounting
odds Trump’s chances of beating Clinton were growing. But the
following Sunday, the FBI cleared Clinton a second time on her
classified e-mails. So gold plunged the Monday immediately before
Election Day. For months gold had traded as if a surprise Trump win
would be bullish for it and bearish for general stocks, due
to soaring uncertainty.
Gold
closed right at its 200dma on Election Day, and gold futures
rocketed 4.8% higher that evening as Trump began taking the lead as
votes were counted. But stock markets started surging on
big-tax-cuts-soon hopes instead of plunging as feared on a Trump
win. So demand for gold, a unique asset tending to move counter
to stock markets, withered. The Thursday after the election,
gold plunged through its 200dma.
That
was a decisive breakdown, defined as 1%+ beyond a key
technical level. Traders view 200dmas as critical demarcations
between bulls and bears. Bulls are healthy as long as prices remain
above their own 200dmas. But once that strong bull-market support
fails, all bets are off. It impairs the assumption that a bull
actually still remains in force. So technically-oriented traders
start unwinding their long positions.
Thus
gold plunged sharply in mid-November following that 200dma
breakdown. That dragged gold’s other main moving average lower, its
50dma. 50dmas provide strong support within bulls except during
major corrections, when 200dmas take over. That plunging 50dma soon
crossed below gold’s 200dma in mid-November, triggering the infamous
Death Cross. That’s a powerful warning signal preceding new bear
markets.
Major moving-average crossovers are particularly important for
futures speculators, who dominate gold’s short-term price action.
These traders can run extreme leverage to gold prices approaching
30x, way over an order of magnitude greater than the 2x legal
limit in the stock markets. So they can’t afford to be wrong for
long, or risk catastrophic losses. Thus 200dma breakdowns and death
crosses are taken very seriously.
So
the extraordinary
mass exodus of speculators and investors from gold in the wake
of those surprise election results continued. There was massive
selling in both the
gold futures
favored by speculators and the leading GLD SPDR Gold Shares ETF
favored by investors. It was an anomalous bloodbath, which
ultimately climaxed in mid-December the day after the Fed hiked
rates for the second time in 10.5 years.
That
extreme post-election anomaly in gold was driven by a potent
combination of failing technicals and the stock markets
surging to new record highs as Trumphoria reigned. But it wasn’t
able to force gold’s young new bull back into bear-market territory,
with a huge-but-not-bear-magnitude total correction of 17.3% over
5.3 months. Gold was again universally despised and left for dead,
just like a year earlier.
Yet
out of that very despair the second upleg of gold’s young bull was
born. Everyone susceptible to being scared into selling low in the
election’s wake had exited, leaving only buyers. Gold soon started
surging sharply into the new year despite the stock markets still
levitating on big-tax-cuts-soon hopes. By mid-January a new
bull-upleg uptrend channel was forming. Gold’s 50dma soon
stabilized and turned north.
Gold
powered higher into late February, nearly regaining its key 200dma
lost a couple days after the election. But then something else
super-unprecedented happened, fitting in these crazy times.
Futures-implied rate-hike odds for the Fed’s imminent mid-March
meeting skyrocketed. They were just 22% on February 24th when gold
closed near $1257, but quadrupled to 86% in just 6 trading days
on hawkish Fed jawboning!
So
gold-futures speculators fled for the hills on imminent-rate-hike
fears, despite the fact gold has climbed
an average of
26.9% during the exact spans of the previous 11 Fed-rate-hike
cycles since 1971. The day before the Fed’s March meeting when
rate-hike odds hit 93%, gold slumped to $1198. That was just under
its fast-rising 50dma, forming the lower support of gold’s newest
uptrend channel. Then the Fed hiked.
That
was universally expected and fully priced in. But top Fed officials
didn’t raise their forecast for the total number of rate hikes in
2017, as gold-futures speculators had feared. So gold started
surging within minutes of that third Fed rate hike confirming the
Fed’s 12th modern rate-hike cycle was underway. But as gold neared
its 200dma again, it stalled. That key moving average also offers
strong overhead resistance.
Just
as prices knifing down through 200dmas from above are seen as likely
signaling new bears, prices bursting through from below are seen as
heralding new bulls. This isn’t always true. Though close, gold
didn’t enter a new bear following its early-November 200dma
breakdown. And since its young bull had never ended, it can’t be
starting a new bull now. Still, 200dma crossovers motivate traders
to buy and sell en masse.
After spending over two weeks leading into early April stuck just
under its 200dma, gold finally surged 1.5% on the 11th and broke
through. Mounting geopolitical fears motivated both futures
speculators and GLD-share investors to buy aggressively. That
200dma breakout was decisive, carrying gold more than 1% above its
key moving average. And once that heavy perceived resistance
yielded, gold buying accelerated.
Over
the decades if not centuries, 200-day moving averages have become
the most-important technical line followed universally by nearly all
traders. This is essentially a 10-month moving average, long enough
to distill down major trends while filtering out volatile daily and
weekly price noise. Prices above 200dmas are seen as being in bull
uptrends, which traders want to ride. So 200dma breakouts ignite
big buying.
As
gold showed in February 2016, that soon becomes self-fulfilling.
The more capital pouring into gold, the faster its price is bid
higher. The more gold’s price rallies, the more it catches the
attention of other speculators and investors who want to chase this
momentum. So they too start buying in. The reason technical
analysis works is because big traders move big capital based on
long-proven-out price signals occurring.
So
gold’s newest decisive 200dma breakout last week is likely to prove
as bullish as this bull’s initial one from early last year. It
changes the entire perception of gold, shifting collective
sentiment from late-2016’s watch-out-for-a-bear mode to a
gold-is-heading-much-higher outlook. In markets buying begets
buying, regardless of what first sparked that buying. Traders just
love to chase winners, so momentum builds.
And
that psychological impetus to redeploy in gold is likely to soon
grow much stronger. Gold is nearing a fabled Golden Cross buy
signal! That’s when a 50dma crosses back above a 200dma from
below. It’s one of the best-known and strongest technical buy
signals, universally seen as heralding the early days of new bull
markets. In gold’s case today, its nearing golden cross will prove
its bull is very much alive and well.
The
timing of this next golden cross depends on how fast gold keeps
advancing and thus dragging its 50dma higher. Its 50dma could cross
back over its 200dma within a couple weeks at best, or a couple
months on the outside. Either way, that big technical event is
going to really accelerate the shift in prevailing gold sentiment
from bearish back to bullish. That will clear the way for
much-larger capital inflows into gold.
So
momentum is really building in this gold bull’s young second upleg.
Interestingly this is right in line with this metal’s usual
strong spring
rally from mid-March to late May. After last year’s 200dma
breakout and golden cross confirmed the first new gold bull since
2011, the resulting momentum was so strong gold rallied right into
early July before regrouping. Gold’s technicals today are
very bullish for the coming months.
The
sentimental impact of this technical action has already been big
enough to fuel big bullish changes in gold’s fundamentals.
It’s not just futures speculators buying aggressively, but
longer-term investors. This is very important for this gold upleg’s
longevity, as investment buying is far more resolute. Investors are
holding gold for longer time horizons, usually with zero leverage.
And they control huge sums of capital.
The
readiest proxy for gold investment demand is the holdings of that
leading American GLD gold ETF. Unlike global gold supply-and-demand
statistics which are only compiled and published quarterly, this
dominant gold ETF releases its holdings daily. So they are
the highest-resolution read available of what is going on in gold
investment in real-time. GLD has seen big capital inflows since
gold’s latest 200dma breakout.
GLD’s mission is to mirror the gold price. But GLD shares have
their own supply and demand totally independent from gold’s. So
GLD’s price is constantly threatening to decouple from gold’s. The
only way to maintain tracking is for GLD’s managers to shunt any
excess buying or selling pressure on its shares directly into
gold itself. Thus GLD’s physical-gold-bullion holdings rise and
fall with capital flows.
In
the first half of 2016, stock investors were buying GLD shares far
faster than gold itself was being bought. So GLD issued new shares
to supply and offset this excess differential demand. The proceeds
were then immediately plowed into gold, growing the bullion GLD
holds in trust for its shareholders. So quite literally, GLD is
a conduit for the vast pools of stock-market capital to flow
into gold. That bids gold higher.
This
chart notes the quarterly changes in gold’s price and GLD’s
holdings, the latter in both percentage and tonnage terms. Gold
surged in 2016’s first couple quarters on stock-market capital
flooding into GLD shares. Then gold stalled in Q3’16 because that
differential GLD-share buying ceased. Then right after the
election, heavy GLD-share differential selling emerged which drove
gold sharply lower in Q4’16.
When
stock investors dump GLD shares faster than gold is being sold, GLD
prices face running away from gold to the downside. So that excess
GLD-share supply must be sopped up. GLD’s managers raise the
capital to buy back these shares by selling physical gold bullion.
That directly weighs on the world gold price. Amazingly, capital
flows via the American GLD are one of gold’s
dominant primary
drivers globally!
Realize gold is strong when investors are buying it via GLD, and
weak when they are selling it through this same stock-market
conduit. Following their post-election plunge, GLD’s holdings
stabilized in late January and started surging again in early
February. Large funds were reestablishing gold positions. But once
the general stock markets started powering higher again on Trump
teasing tax cuts, that buying ceased.
After those promising builds, GLD suffered draws again in early
March after Fed-rate-hike odds soared. But contrarian buying drove
a modest holdings rebound leading into that rate hike. Then that
fund buying petered out again as gold stalled under its 200dma.
Differential GLD-share buying didn’t resume until, you guessed it,
gold’s 200dma breakout last week! That convinced large investors
gold’s bull remains alive.
Since then, GLD has enjoyed big daily builds of 0.5%, 0.8% and even
a monster 1.4% this Wednesday! The mounting technical momentum
after that 200dma breakout is fueling real fundamental investment
buying. Again the self-feeding psychology of rising prices argues
this trend will only accelerate. The more American stock-market
capital flows into gold bullion via GLD shares, the faster gold’s
price will climb.
The
faster gold rallies, the more investors and speculators alike will
want to buy it to ride the momentum. While these lofty
Trumphoria-distorted stock markets continue to retard gold
investment demand, the big 200dma breakout is starting to overcome
that. And the nearing golden cross will further cement the shift
back to bullish sentiment. This gold upleg is really set up to
accelerate considerably in the coming months!
While this gold bull itself should continue to see nice gains, they
will be dwarfed by those of the leading gold miners’ stocks. The
major gold miners tend to leverage gold’s upside by 2x to 3x,
reflecting the outsized impact of higher gold prices on
operating profits.
And smaller gold miners often amplify gold’s upside even more.
Gold’s bull is fueling a parallel much-larger bull in gold stocks,
greatly multiplying wealth.
During roughly the first half of last year when gold powered 30%
higher, the leading gold-stock index actually rocketed up 182%!
Gold stocks just staged
a major breakout
of their own, and their
bull-market
upside targets are vastly higher than today’s levels. Sooner or
later everyone will figure this out, and bid gold stocks radically
higher. But for now they are flying under most radars, creating
excellent buying opportunities.
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The
bottom line is momentum is really building in this second upleg of
gold’s young bull market. Despite plenty of lingering bearishness,
gold just achieved a major breakout back above its key 200-day
moving average. This signaled to large technically-savvy traders
that gold’s bull is very much alive and well, so they are moving
capital back in. This is evidenced by surging differential buying
of GLD shares post-breakout.
The
resulting higher gold prices are finally starting to shift gold
sentiment back to bullish again. And as usual, that will become
self-feeding. Speculators and investors alike love chasing winners,
so buying begets buying. The more capital flows into gold, the
higher its price climbs. The more gold rallies, the more traders
want to buy it. This virtuous circle can run for months, gold’s new
200dma breakout is only the start. |