This
secular gold bull’s latest upleg is strengthening, as traders
gradually diversify into the yellow metal. Major bullish drivers
are contributing to gold’s renaissance, led by the Fed’s epic money
printing and the raging inflation it has unleashed. Weakening stock
markets are also fueling mounting gold demand. This resulting gold
upleg is powering higher on balance, albeit in volatile fashion due
to gold-futures speculation.
Secular bull markets are an alternating series of uplegs followed by
corrections, prices trending higher by taking two steps forward
before one step back. Gold’s last near-correction-grade selloff
bottomed back in late September at $1,725. That left the yellow
metal very-oversold and mired deep in widespread bearish sentiment,
a perfect breeding ground to spawn a major new upleg. And indeed an
impressive one was born.
At
best in early March, gold had surged 18.9% higher in just 5.3
months! Those gains mounted as gold’s big geopolitical spike in
response to Russia invading Ukraine peaked. But still this week as
that crisis is fading from headline financial news, gold remains up
a strong 13.9% over 6.4 months. Nearly 3/4ths of this upleg’s
gains are intact despite traders’ geopolitical fears waning!
Gold’s bull market is alive and well.
This
young upleg is the sixth of gold’s secular bull, and is already
remarkable. Gold’s strengthening gains have accrued despite fierce
headwinds from the relentless drumbeat of unbelievably-hawkish
jawboning and actions from top Fed officials. While speculators
dumped gold-futures contracts on many of those, gold quickly
rebounded from the resulting selloffs. Gold’s fundamentals are
strong to overcome those.
Back
in late September, gold’s correction lows came a week after the
Federal Open Market Committee pre-announced it would soon start
slowing its epic money printing from its fourth quantitative-easing
campaign. Then at the FOMC’s next meeting in early November, Fed
officials decided to start that QE4 taper right away rather than
wait until December like expected. Gold still surged after that
policy decision.
Then
in mid-December at the next FOMC meeting, the Fed doubled the pace
of that QE4 taper to $30b per month. Even more hawkish, top Fed
officials’ collective outlook for future federal-funds-rate hikes
tripled from two total in 2022 and 2023 to fully six! That
triggered a minor gold selloff, but the yellow metal kept generally
grinding higher. Until that very FOMC meeting’s minutes were
released in early January.
They
heaped on another pile of hawkishness, revealing top officials were
discussing an early balance-sheet runoff. So
quantitative-tightening bond selling, effectively starting to
destroy some of the vast QE4 money printed, was suddenly looming!
At its next late-January meeting, the FOMC warned its first FFR hike
was coming in mid-March. The Fed chair also said QT would arrive
sooner and run faster than last time.
That
QE4 turbo-taper finished in March, ending that monetary-deluge era.
And the FOMC indeed hiked at its next meeting in the middle of that
month, birthing its thirteenth rate-hike cycle since 1971. And the
top Fed officials’ FFR outlook in that dot plot skyrocketed from
three quarter-point hikes projected this year to a whopping seven
total! Recent months have seen one of the Fed’s most-extreme
hawkish pivots ever.
Any
one of these FOMC revelations, and plenty of other lesser jawbonings
from Fed officials, could have derailed gold’s young upleg. And all
of them together probably should have, as speculators have a long
history of fleeing gold futures on hawkish Fed surprises which
hammers gold lower. Yet gold overcame this immense
gold-futures-selling fodder to continue rallying on balance,
even defying a surging US Dollar Index!
Again up 18.9% at best on that Russia-invading-Ukraine geopolitical
spike, gold’s upleg remains smaller than average. Born back in
mid-December 2015 as the FOMC started its previous rate-hike cycle,
this secular gold bull has enjoyed five earlier uplegs which
averaged big 29.3% absolute gains! If this latest sixth upleg
merely lives up to that precedent, gold would surge to $2,231 before
this run higher matures.
Yet
this time around gold’s upside potential is much greater than
normal, given the amazing fundamental backdrop the yellow
metal enjoys. That includes this raging inflation unleashed by the
Fed’s enormous QE4 money printing, and the mounting apparent bear
market in bubble-valued stock markets. Yet most traders are
overlooking their exceedingly-bullish implications for gold,
partially blinded by recent price action.
As
Russia invaded Ukraine in late February and soon after, gold
sentiment was rapidly improving as this leading alternative asset
surged higher in a massive geopolitical spike. In just seven
trading days, gold rocketed up 8.6% to a $2,051 interim high!
Excited traders understandably thought gold was off to the races,
then were disappointed after it rapidly plunged symmetrically to
that surge. That slammed sentiment.
Traders shouldn’t have been surprised when that geopolitical spike
quickly collapsed, as that left gold very overbought and those
are always short-lived. The very day gold peaked on March 8th,
I warned our
weekly-newsletter subscribers that “Unfortunately gold is
getting overbought after such a big, fast run.” Thus “the odds for
an imminent sharp rebalancing selloff” were soaring. That plunge
should’ve been expected.
Gold
prices have two primary drivers, investment demand and speculator
gold-futures trading. While the former is ultimately far-larger and
way-more-important for fueling secular gold bulls, the latter is
much more potent for driving short-term volatility. While
they command vastly-less capital firepower than gold investors,
gold-futures speculators punch way above their weights in gold-price
influence due to extreme leverage.
Each
contract controls 100 troy ounces of gold, worth $196,500 this
week. Yet traders are only required to maintain $7,200 cash margins
in their accounts per contract. That enables leverage running as
high as 27.3x! At those extreme levels, every dollar deployed in
gold futures has 27x the gold-price impact as a dollar invested
outright. Such huge leverage is crazy-risky, forcing a myopic
ultra-short-term trading focus.
At
27.3x, gold-futures speculators can’t afford to be wrong on gold
prices for long. A mere 3.7% gold move against their bets would
wipe out 100% of their capital risked! So these traders live or die
by piling onto gold’s immediate momentum. Their leveraged
buying and selling really amplifies gold’s volatility, leaving
messier trend channels in its wake. That’s what drove gold’s
anomalous geopolitical spike and collapse.
This
chart superimposes gold’s price action over the last couple years or
so on speculators’ positioning in longs and shorts, upside and
downside bets on gold prices. These totals are published weekly in
the famous Commitments of Traders reports. Enormous leveraged
gold-futures buying fueled gold’s ill-fated geopolitical spike, and
massive gold-futures selling killed it. Neither affected gold’s
underlying upleg uptrend.
Russia technically launched its Ukraine invasion overnight into
February 22nd, moving “peacekeeping” forces into that country’s
eastern separatist Donbas region. The broader national invasion
came a couple days later overnight into the 24th. Even as little as
a week before that formal invasion, most traders didn’t think
Vladimir Putin would actually pull the trigger. Market action
mostly assumed he was saber-rattling.
So
as late as mid-February, Russia invading Ukraine wasn’t priced
into most markets. Still at that point gold’s young upleg had
already powered 8.5% higher over 4.5 months. Despite that
relentless drumbeat of Fed uber-hawkishness, spec gold-futures
buying played a major role. In that pre-invasion span, they sold
14.2k long contracts but bought to cover 35.5k short ones for
gold-equivalent buying of 66.2 metric tons.
Identifiable gold investment demand in that early-upleg timeframe
was way smaller than gold-futures buying. The leading proxy for
global gold investment is the combined holdings of the dominant GLD
SPDR Gold Shares and IAU iShares Gold Trust gold exchange-traded
funds. Rising holdings reveal the vast pools of American
stock-market capital migrating into gold. GLD+IAU holdings
saw a 1.6% or 23.8t build then.
Geopolitical fears first really ignited gold on February 17th, when
it blasted up 1.7% to $1,899. That came after the US secretary of
state warned the United Nations Security Council that Russia was
trying to fake a false-flag pretext to justify an invasion of
Ukraine. So gold’s big distorting geopolitical spike ran from the
prior day’s close to gold’s March 8th peak. Gold blasted 9.8%
higher to $2,051 in that several-week span!
That
was mostly fueled by speculators massively flooding into gold
futures. They added an enormous 60.6k long contracts in that short
period, which was slightly offset by another 7.4k of short selling.
CoT weeks run between Tuesday closes, and any long or short trading
over 20k contracts is huge. In the week ending February 22nd on
that invasion scare and initial invasion, total spec longs
skyrocketed 39.2k contracts!
All
that added up to colossal gold-equivalent buying of 165.4t to fuel
gold’s sharp geopolitical spike! With gold blasting higher and
uncertainties exploding, gold investment demand also surged. But
GLD+IAU holdings only saw a 3.7% or 55.6t build in that several-week
span, just over a third the size of that giant gold-futures buying.
That implies about 3/4ths of gold’s geopolitical spike was
directly driven by futures.
But
gold geopolitical spikes are always risky because they depend on
headlines, which quickly change. Overnight heading into March 9th,
speculators overextended with gold-futures longs had to start
dumping them after hopeful comments from Ukraine’s government fanned
peace-talks hope. Like usual in hyper-leveraged gold futures, that
selling cascaded ultimately hammering gold 2.9% lower to $1,992 that
day!
That
Russia-invading-Ukraine geopolitical spike was already failing as
rapidly as it had surged, despite that war still intensifying. Over
the next week, gold collapsed 6.6% to $1,916. Heavy gold-futures
selling was to blame as speculators rapidly unwound their
excessively-bullish bets. Specs dumped 19.5k longs, but that was
about half offset by 10.0k of short-covering buying. That netted
out to a gold-equivalent 29.6t.
Since those CoT reports are only released weekly, their resolution
is low for fast gold moves. In the following CoT week, specs dumped
gold futures for another 49.3t in gold-equivalent terms. That
geopolitical spike driven by huge gold-futures buying collapsed on
major gold-futures selling. Gold’s sharp drop didn’t faze
investors though, as GLD+IAU holdings still edged up 0.1% or 1.5t in
that span where gold fell 6.6%.
The
important takeaway here is gold’s young upleg was
well-established before Russia invading Ukraine spawned that few
weeks of furious buying! That geopolitical spike catapulted gold
above its uptrend resistance, accelerating upleg gains. But the
subsequent inevitable failure of that headline-news-driven
gold-buying frenzy merely forced gold back to uptrend resistance,
staying above this metal’s 50-day moving average.
Gold’s fast geopolitical spike and its symmetrical failure were a
futures-driven anomaly, a distraction from this bull’s
strengthening sixth upleg. The gold-futures selling collapsing that
spike dragged spec longs back down to the lower third of their
gold-bull uptrend, leaving lots of room for these traders to buy
back in and push gold higher. Spec shorts are high in their
gold-bull downtrend, so short-covering buying is also likely.
While most traders perceive lower post-spike gold prices as
weakness, gold has actually proven strong consolidating
relatively-high before resuming rallying in this past week. Gold’s
upleg is again running a healthy 13.9% over 6.4 months as of
mid-week. That has mostly been fueled by speculators buying 37.7k
long contracts and buying to cover another 50.9k short ones. That
is 275.6t of gold-equivalent buying!
But
the far-more-durable and important gold investment demand has been a
big driver of gold’s strength too. The identifiable component of
that in GLD+IAU holdings surged 8.1% or 121.1t in that whole-upleg
span since late September! While investors love flocking back to
gold to chase upside momentum, the yellow metal’s underlying
fundamental backdrop is one of the most-bullish ever witnessed
in our lifetimes.
The
Federal Reserve panicked during March 2020’s pandemic-lockdown stock
panic, slashing the FFR to zero and radically accelerating QE4 to
wildly-unprecedented monstrous proportions. Between then and late
March 2022, the Fed ballooned its balance sheet an insane 115.5% or
$4,804b! Effectively more than doubling the US-dollar supply
in just 24.9 months is why red-hot inflation is now raging out of
control.
Relatively-more money competing for relatively-less goods and
services relentlessly bids up their prices. Everyone running
households or businesses knows actual inflation is much worse than
the government reads suggest. Even the latest
intentionally-lowballed headline Consumer Price Index print this
week showed prices soaring 8.5% year-over-year! That’s the
fastest seen since all the way back in December 1981.
The
Fed can’t slay this disastrous inflation it unleashed unless it both
hikes its FFR well above headline inflation rates and
reverses a sizable-to-large fraction of that epic QE4 money printing
with QT. Despite all the tough hawkish talk by top Fed officials
since September, actually accomplishing either is highly-unlikely.
A double-digit FFR or half-QE4 unwind would crush today’s
QE4-levitated
bubble-valued stock markets.
Just
like the last time the Fed attempted QT after QE3, it will
likely cave on
tightening once the US stock markets fall significantly into
bear-market territory. The resulting negative wealth effect would
trigger a severe recession if not a full-blown depression, which Fed
officials won’t risk. So with all proposed rate hikes and QT
wildly-insufficient to stuff this monetary-deluge genie back in its
bottle, high inflation will persist.
The
only comparable
inflation super-spikes in modern history came in the mid-1970s
and late-1970s. There is nothing more potent for fueling big gold
investment demand than festering inflation eroding away purchasing
power. Gold prices nearly tripled during the 1970s’ first
inflation super-spike then more than quadrupled during the
second! Today’s secular gold bull will almost certainly power way
higher in current inflation.
The
Fed had to resort to extreme measures to slay those earlier
inflation super-spikes, hiking its FFR to stellar average levels of
8.7% and 17.2% in the peak-CPI-inflation months of December 1974 and
March 1980! Today the most-hawkish top Fed officials are merely
talking about a 3.5% federal-funds rate to fight 8.5% CPI
inflation. FFR levels have to exceed headline inflation rates,
which would crush the US economy.
And
contrary to gold-futures speculators’ irrational paranoia on Fed
tightenings, Fed-rate-hike cycles have actually proven very bullish
for gold historically. There have been fully twelve since 1971
before today’s latest one. Gold averaged strong 29.2% gains across
the exact spans of all dozen. In the eight of those where gold
rallied, its average gains soared to 49.0%! In the other
four, gold averaged mild 10.5% losses.
Gold
performed best during Fed-rate-hike cycles when it entered them
relatively-low and they unfolded gradually. In mid-March as the
FOMC kicked off its thirteenth rate-hike cycle, $1,916 gold remained
7.1% under its $2,062 bull-to-date peak from early August 2020
19.3 months earlier. And as Fed rate hikes hit bubble-valued
stock markets, the FOMC is unlikely to hike more than once per
regularly-scheduled meeting.
The
main reason gold
thrives in Fed-rate-hike cycles is they are so bearish for
stock markets. Weaker stock prices encourage investors to
prudently diversify their stock-heavy portfolios with counter-moving
gold. With the worst inflationary backdrop since the 1970s, gold
investment demand should dramatically grow in coming years. With
the lion’s share of this secular gold bull still ahead, today’s
upleg has great potential.
The
biggest beneficiaries of higher gold prices are the gold miners’
stocks. As their earnings amplify gold prices, they are
enjoying their
own mounting upleg. The leading GDX gold-stock ETF has surged
37.7% since late September, paralleling gold’s 13.9% upleg gain!
That is making for 2.7x upside leverage, on the higher side of the
usual 2x-to-3x range. And GDX is
dominated by
major gold miners, which underperform.
Fundamentally-superior
mid-tier and
junior gold miners achieve much-better gains during gold uplegs
than the majors! They are better able to consistently grow their
gold production from smaller bases, while their
lower-market-capitalization stocks are easier to bid higher. Our
specialty at Zeal is researching this universe to uncover the best
gold stocks and silver stocks to trade to multiply wealth during
secular gold bulls.
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The
bottom line is this gold bull’s underway sixth upleg is still
strengthening. It has impressively powered higher on balance since
last autumn, through one of the most-hawkish Fed pivots on record.
This strong gold uptrend was well-established before gold’s recent
Russia-invading-Ukraine geopolitical spike flared then collapsed.
Gold consolidated higher in that aftermath, further cementing this
upleg’s progress and potential.
Gold
investment demand is growing in the biggest inflation super-spike
since the 1970s. While top Fed officials are aggressively jawboning
on fighting that, their implied coming rate hikes and QT remain way
too small. So raging inflation will continue to fester while Fed
tightening crushes bubble-valued US stock markets. This
powerfully-bullish backdrop will drive gold much higher, catapulting
gold stocks to huge gains. |