Gold
has faded from interest in the past couple months, overshadowed by
the monster stock-market rally. But gold has been consolidating
high, quietly basing before its next challenge to major $1350
bull-market resistance. A decisive breakout above will really catch
investors’ attention, greatly improving sentiment and driving major
capital inflows. With gold-futures speculators not very long yet,
plenty of buying power exists.
Last
August gold was pummeled to a 19.3-month low near $1174 by extreme
all-time-record
short selling in gold futures. The speculators trading these
derivatives command a wildly-disproportional influence on short-term
gold price action, especially when investors aren’t buying.
Gold-futures trading bullies gold’s price around considerably to
majorly, which can really distort psychology surrounding the gold
market.
The
main reason is the incredible leverage inherent in gold futures.
This week the maintenance margin required to trade a single
100-troy-ounce gold-futures contract is just $3400. That’s the
minimum cash traders have to keep in their accounts. Yet at the
recent $1300 gold price, each contract controls gold worth
$130,000. So gold-futures speculators are legally allowed to run
extreme leverage up to 38.2x!
That’s extraordinarily risky of course. A mere 2.6% adverse move in
gold against traders’ fully-leveraged positions would result in 100%
total losses. It’s amazing these guys can sleep at night. For
comparison, the stock markets’ legal limit has been 2x leverage
since 1974. 10x, 20x, 30x+ is crazy, and has been very problematic
for gold for decades. It greatly amplifies gold-futures
speculators’ impact on gold prices.
Every dollar deployed in gold futures at 30x leverage literally has
30x the influence on gold prices as a dollar invested in gold
outright! So even though gold-futures speculators have far less
capital available than investors, it is way more potent amplified up
to 38x! Thus when gold investment demand is weak like recently with
stellar stock-market complacency, gold-futures speculators utterly
dominate gold price action.
Their collective trading effectively controls gold psychology too,
since the American gold-futures price has become the world’s leading
gold reference one. Investors start feeling bullish on gold and
buying usually only after gold-futures speculators push its price
higher. And gold-futures selling leaves investors bearish and
worried, impelling them to exit gold. Gold-futures trading is
the tail that wags the gold-investment dog!
So
everyone interested in gold has no choice but to follow what the
gold-futures speculators as a herd are doing. The US Commodity
Futures Trading Commission publishes weekly data showing their
collective positioning, the famous Commitments of Traders reports.
They are released late Friday afternoons, and show traders’
aggregate gold-futures long and short contracts held as of the
preceding Tuesday closes.
Despite gold’s solid upleg since those deep mid-August lows, these
traders still have lots of buying power left to push gold
considerably higher. This first chart superimposes the daily gold
price in blue over specs’ weekly total gold-futures long and short
contracts in greed and red. The great majority of gold’s
upleg-to-date gains have been driven by short-covering buying. Very
bullishly the larger long buying is still yet to come.
In
mid-August when today’s gold upleg was born, speculators’ total
gold-futures shorts rocketed way up to 256.7k contracts! That was
the highest witnessed in the 19.6 years since early 1999, almost
certainly an all-time record. That unprecedented orgy of extreme
shorting hammered gold from roughly $1300 down to $1175 in a couple
months or so. That sharp futures-driven gold plunge naturally
devastated psychology.
The
gold-futures traders were effectively borrowing gold they didn’t own
to dump in the markets, hoping to buy it back later at lower prices
and profitably repay those debts. They were doing it at extreme
30x+ leverage, proportionally amplifying their capital’s price
impact. That record shorting spree had nothing to do with
fundamentals, it was a snowballing momentum thing. Yet investors
were spooked into selling in sympathy.
In
mid-June when gold traded just over $1300, total spec shorts were
only 100.3k contracts. But over the next 10 CoT weeks they
skyrocketed 156% higher to that record 256.7k. The resulting gold
carnage led American stock investors
to sell shares in
the leading GLD SPDR Gold Shares gold ETF much faster than gold was
being sold. That forced its gold-bullion holdings 60.1 metric tons
or 7.2% lower in that short span!
Gold
bottomed the very week gold-futures short sellers had exhausted
themselves, reached the limits of their available capital. Since
then gold has powered nicely higher on balance, enjoying a 14.2%
upleg over the next 6.2 months into mid-February. Gold peaked near
$1341 then and has been consolidating high ever since. This
upleg has been almost fully driven by gold-futures buying, which is
totally normal.
To
close gold-futures short positions and repay those debts,
speculators have to buy gold-futures long contracts to offset them.
They bought to cover an enormous 112.3k short contracts in this
upleg’s span, mostly unwinding last summer’s record shorting spree.
They also added another 46.8k long contracts, leveraged upside bets
on gold’s price. Despite all that gold-futures buying, there is
still room for much more.
Major gold uplegs
have three stages, each driven by distinctive buying from
different groups of traders. Uplegs are always born and initially
fueled by gold-futures short covering, as speculators are motivated
to buy to cover and realize their shorting profits. Short covering
quickly becomes self-feeding, as resulting fast gold-price gains
force other short-side traders to rapidly buy to cover or face
catastrophic leveraged losses.
Thus
that stage-one short-covering buying quickly burns itself out after
a couple months or so. But it first pushes gold high enough for
long enough to convince long-side gold-futures speculators to
return. They command way more capital than the short-side guys, as
evidenced by the green long line in this chart usually being much
higher than the red short line. Spec gold-futures long buying is
uplegs’ second stage.
That
unfolds more gradually than short covering, typically 6 months or
longer. Long-side traders not only have lots more capital to
deploy, but their buying is voluntary. They have to really believe
gold is heading higher to make such risky hyper-leveraged upside
bets. In contrast short covering is mandatory and often
involuntary, as those effective debts must legally be repaid.
Stage-one buying directly ignites stage two.
Gold
has real bull-market breakout potential in the coming months
because this current upleg hasn’t yet seen much gold-futures long
buying. Stage two is underway, but the majority is likely still yet
to come. The green total-spec-gold-futures-longs line above proves
this. At best in mid-February near gold’s latest high, total spec
longs peaked at 305.0k contracts. And they have since retreated
sharply to 243.8k as of last Tuesday.
Both
levels are really low by bull-to-date precedent. This young
secular gold bull was born out of deep 6.1-year secular lows in
mid-December 2015. Its maiden upleg was big and fast, gold rocketed
29.9% higher in just 6.7 months in essentially the first half of
2016. As that peaked in early July 2016, total spec longs hit an
all-time record high of 440.4k contracts! Gold-futures traders
piled on, helping fuel big upside momentum.
Total spec shorts that same CoT week ran 100.2k contracts. That
upleg had been partially driven by the gold-futures speculators
buying a monster 249.2k longs while covering 82.8k shorts. Gold
crested at $1365 in early July, which remains this bull’s best level
today. Over the subsequent years $1350 would repel gold multiple
times, becoming major overhead resistance as gold kept
failing to break out above it.
Speculators soon started to unwind their excessive long positions,
helping hammer gold 17.3% lower by mid-December 2016. That heavy
gold-futures selling was greatly exacerbated by stock markets
surging after Trump’s surprise election victory. This gold bull’s
second upleg emerged from the ashes, driven first by gold-futures
short covering which soon ignited gold-futures long buying. That
was also the first upleg’s order.
Gold
powered another 20.4% higher to $1358 by late January 2018, and once
again gave up its ghost right near that key $1350 resistance.
Gold-futures speculators ultimately played a smaller role in that
upleg as investors returned. Gold investment buying is the third
stage of gold uplegs, which can grow far larger than
gold-futures-driven stages. Futures buying is a two-stage ignition
mechanism to attract investors.
Total gold-futures longs only climbed 80.6k contracts during that
second upleg, while shorts only slipped 4.1k. That’s somewhat
misleading though, as the precise upleg dates mask the green long
line trending higher while the red short line trended lower. When
that upleg peaked, total spec longs and shorts were running 356.4k
and 121.9k contracts. The former was still much higher than today’s
levels, a very-bullish omen.
This
gold bull’s first two uplegs failed with total spec longs far
higher than today’s 243.8k, averaging 398.4k contracts.
Second-stage spec long buying has exhausted itself and killed uplegs
between roughly 350k to 450k contracts in this gold bull. So the
sub-250k levels seen last Tuesday remained way too low to likely
signal a mature gold upleg. Speculators still have room to do the
majority of their stage-two long buying!
This
gold upleg is highly likely to see at least another 100k contracts
of long buying, and potentially up to 200k if gold returns to
favor! That is the gold-futures equivalent to another 311 to 622
metric tons of gold. That will almost certainly catapult gold much
higher, just like during this bull’s prior uplegs. Given where gold
is today, this creates major bull-market breakout potential.
A concerted assault on $1350 is likely.
Throughout this entire gold bull, gold has never been higher with
sub-250k spec longs than it is today near $1300! Usually the yellow
metal was only around $1250 at this kind of positioning. So we are
now witnessing gold’s highest basing in its bull market
relative to spec longs. $1350 isn’t much higher than $1300, just
another 3.8%. There’s a good chance the remaining stage-two buying
will drive gold there.
While it’s certainly not exact, 50k contracts of gold-futures long
buying in this bull’s other gold uplegs have often pushed gold $50
higher. Again we are almost certain to see another 100k and
potentially a best case of 200k. So gold has never been better
positioned in this bull market to surge up to and through its
multi-year $1350 resistance! A decisive breakout above $1350 would
change everything in the gold market.
Gold-futures speculators are necessarily trapped in the short term
by their extreme leverage. They don’t care what gold does, they
just want to ride its momentum. Investors are way different, with
no leverage at all they have a long-term focus. There’s nothing
that excites them more, and drives more capital inflows into gold,
than new bull-market highs. Higher highs prove gold is still
marching, portending more future gains.
Investors haven’t seen a new gold-bull high since way back in early
July 2016, which feels like forever ago in these markets. As the
months and years paraded by and gold kept failing to best $1350,
most investors gradually lost interest in gold. While its
bull-market lower-support zone has gradually risen, the horizontal
upper resistance really tainted psychology. Gold has been viewed as
consolidating, not in a bull.
But
100k to 200k contracts of spec gold-futures long buying starting
near $1300 has real potential to blast gold back above $1350. A
decisive breakout is 1%+ beyond that, or $1364. Once gold climbs
back over $1365, it will start hitting new bull-to-date highs. That
will bring gold back into the financial news in a big way,
rekindling investor interest and capital inflows. The resulting
bullish sentiment becomes self-feeding.
Major stage-three investment gold buying gets way more likely the
higher gold forges above $1350. It’s ironic that although
investment is all about buying low when assets are out of favor, the
great majority of investors instead prefer to buy high. They
love chasing winners, and increasingly crowd into positions the
higher their prices climb. There’s no doubt new bull-market gold
highs will fuel big excitement in this metal.
Gold’s bull-market breakout potential in the coming months is
amplified by a couple other major factors. Gold is in a
seasonally-strong time of the year, enjoying its
seasonal spring
rally. That provides a solid sentimental tailwind that should
help motivate gold-futures speculators to continue rebuilding their
low gold-futures long positions. Their buying also becomes
self-feeding the higher and longer gold runs.
Far
more importantly, gold-investment levels are really low
thanks to the monster stock-market rally since late December. With
the US stock markets skyrocketing from ugly near-bear
severe-correction lows to nearly regaining September’s all-time
highs, complacency and euphoria are epic. Stock investors have
virtually no fear of a major stock-market selloff, which like usual
has greatly retarded gold investment demand.
But
these lofty stock markets are
dangerously
overvalued and overbought, heading into a Q1’19 earnings season
which is looking to be the weakest in years. When the stock markets
roll over again, investors will again remember the wisdom of
prudently diversifying their stock-dominated portfolios with gold.
It tends to rally when stock markets weaken, a rare and desirable
quality. The next material stock selloff will goose gold.
Back
in December when the flagship US S&P 500 stock index plunged 9.2%,
gold surged 4.9% higher. Any material stock-market selloff,
regardless of the reason, will quickly
rekindle gold
investment demand. And if investors start buying even before
gold-futures speculators’ stage-two long buying is complete, a
decisive breakout back above $1350 is all but certain. This gold
bull’s upside breakout potential is very real.
The
biggest beneficiaries of higher gold prices reviving interest in its
bull market will be the gold miners’ stocks. The
major gold miners
of the GDX VanEck Vectors Gold Miners ETF usually amplify gold’s own
moves by 2x to 3x. So a 10% gold rally will often translate into
20% to 30% GDX gains. But when gold really shifts back into favor
among investors, the upside can be far greater. We’ve already seen
that in this bull.
This
GDX gold-stock-bull chart is updated from last week’s essay, where I
explained the
bullish gold-stock situation in depth. So check that out if you
need to get up to speed. But for our purposes today, note the last
time gold powered to new bull-market highs exciting investors was
during this bull’s first upleg largely in the first half of 2016.
GDX skyrocketed 151.2% higher in essentially the same span of that
29.9% gold upleg!
That
made for outstanding 5.1x upside leverage to gold from the
major gold miners. The smaller mid-tier and junior gold miners of
the GDXJ VanEck Vectors Junior Gold Miners ETF did even better.
With their
superior fundamentals and lower market capitalizations,
mid-tier upside
is much better than the majors. Even if gold merely challenges
$1350 again, the gold stocks will surge dramatically higher as
traders flock back.
So
while the lack of interest in gold and its miners’ stocks these days
is understandable, it is unfortunate. The biggest gains are won by
buying relatively low before everyone gets excited about an
asset or stock sector. Once gold and the gold stocks start surging
again as $1350 nears, speculators and investors alike will have to
buy much higher. Deploying aggressively before new bull highs
should yield impressive gains.
One
of my core missions at Zeal is relentlessly studying the gold-stock
world to uncover the stocks with superior fundamentals and upside
potential. The trading books in both our popular
weekly and
monthly
newsletters are currently full of these better gold and silver
miners. Mostly added in recent months as gold stocks
recovered from
deep lows, our unrealized gains are already running as high as
76% this week!
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The
bottom line is this gold bull now has the highest
major-upside-breakout potential of its entire lifespan. This latest
gold upleg fueled by gold-futures buying hasn’t matured yet, as
speculators’ long positioning remains quite low. For the first time
in this bull, gold is already consolidating high around $1300 before
most of the likely gold-futures long buying has run its course.
That makes an assault on $1350 very likely.
If
gold can break decisively above that multi-year resistance and start
forging new bull-market highs, its psychology will greatly improve.
Investors will take notice and start buying again, driving gold
higher and fueling mounting bullishness. The gold miners’ stocks
will be the biggest beneficiaries of new bull-market gold highs.
Their stocks soared the last time investors were excited about this
gold bull, rapidly multiplying wealth. | 
