Gold
remains largely forgotten, off the radars of most investors. But
that’s likely to change soon as this leading alternative investment
is nearing a major bull breakout. Once gold climbs to decisive new
bull-market highs, sentiment will turn and investors’ interest will
surge. Their resulting buying will rapidly drive gold higher,
attracting in more capital inflows. Gold is only a couple modest up
days away from that key breakout.
Universally in all markets, traders’ psychology is completely
dependent on price action and levels. When prices are high and
rising, speculators and investors alike eagerly buy in. They love
chasing winners, so buying begets buying. This creates powerful
self-reinforcing virtuous circles, with rising prices helping to
entice in ever-more traders. In recent years this dynamic
catapulted the market-darling FANG stocks higher.
With
capital inflows following performance, investments that aren’t high
and rallying naturally see waning popularity. That’s the story of
gold over the past couple years or so. Gold’s last new bull-market
high came way back in early July 2016, when it hit $1365. That was
21.3 months ago, which may as well be an eternity in terms of
sentiment. In most traders’ minds, gold has effectively been dead
and buried ever since.
While contrarian investors always follow gold, most mainstream
investors don’t. They only get interested when gold is powering up
to major new highs. This psychology holds true everywhere in the
markets, it’s certainly not unique to gold. A handful of mega-cap
tech stocks have soared since Trump’s election win in November 2016,
but other mega-cap tech stocks have lagged far behind. Traders
always pursue performance.
This
first chart looks at gold’s technical price action over the past
couple years or so. A mighty new bull market erupted out of deep
despair, blasting higher with steep gains. But the
gold-investment-driving force behind it soon reversed, so this young
bull stalled out. Gold hasn’t been able to best those initial bull
highs ever since. So with no new highs to spark excitement, gold
has slipped off investors’ radars.
Gold
prices are heavily influenced by gold-futures speculators. The
extreme leverage
inherent in futures trading enables these traders to punch way above
their weight in bullying the gold price around. There is nothing
these guys fear more than Fed rate hikes, even though history proves
that’s absolutely
irrational. So heading into the Fed’s first hike of this cycle
in December 2015, gold slumped to ugly 6.1-year secular lows.
But
such extreme bearishness made no sense, as
gold has thrived
in past Fed-rate-hike cycles. So once that initial rate hike came
and gold didn’t plunge, speculators rushed to buy back in to gold
futures after that $1051 low. They were soon joined by investors
with their huge pools of capital. They were spooked by the first
stock-market corrections in 3.6 years, which
boost gold demand
to diversify stock-heavy portfolios.
Thus
gold soared 29.9% higher in just 6.7 months in essentially the first
half of 2016, easily crossing that classic +20% new-bull-market
threshold. Gold’s $1365 bull peak in early July 2016 was closely
tied to stock-market fortunes, coming the very day before the
flagship US S&P 500 stock index achieved its first new record close
in 13.7 months. With stock markets off to the races again, gold
investment demand waned.
Gold
had been very overbought after such a blistering rally, and
speculators had
record long positions in gold futures which is a contrarian
indicator. But gold still consolidated high in the summer of 2016
until it was hit by two anomalous events. First gold-futures
stops were run
as gold fell below $1300, driving a sharp drop to its 200-day moving
average. Gold recovered quickly from that until Trump’s surprise
win.
Very
few traders expected Trump to stage a colossal underdog upset and
win the presidential election in early November 2016. It was an
extreme contrarian position, seen as madness. Interestingly as I
wrote the very weekend before that voting, a
powerful
stock-market indicator predicted Trump would indeed win! That
soon came to pass, shocking speculators and investors into greatly
reevaluating their outlooks.
With
Republicans soon to control the presidency and both chambers of
Congress, traders’ euphoria flared to eye-searing brilliance. They
were captivated by hopes for big tax cuts soon, and rushed to
buy stocks with reckless abandon. As the stock markets surged first
on Trumphoria and later taxphoria, gold fell deeply out of favor.
Investors abandoned it since they felt no need to prudently
diversify their soaring portfolios.
Thus
a normal healthy gold correction after a strong upleg cascaded into
a 17.3% plunge over 5.3 months ending in December 2016. Such sharp
losses naturally devastated gold psychology among traders. The bull
market was still alive and well technically, as gold didn’t cross
that -20% new-bear trigger. But gold was still left for dead as the
levitating stock markets sucked in most capital. Traders had
largely moved on.
But
gold still looked really bullish in mid-December 2016, as I
explained within days of that correction low. Investors were
radically
underinvested in gold after fleeing in the election’s wake. And
the truly incredible psychology unleashed by the Republican sweep
wasn’t sustainable or repeatable. It’s pretty rare where nearly
everyone gets presidential and congressional elections so wrong! So
gold was overdue for some buying.
Ever
since that post-election anomaly it has indeed powered higher on
balance in the solid uptrend you can see in this chart above.
Gold has been relentlessly carving a series of higher lows and
higher highs, which made for a 20.4% upleg over the next 13.3
months. That’s actually big enough to qualify as a new bull market,
but again gold never entered a bear. Such strong price action
should’ve improved sentiment.
But
it really didn’t. The extreme taxphoria last year made 2017 one of
the most-extraordinary years on record for the US stock markets.
The S&P 500 ceaselessly levitated to a massive 19.4% gain in the
first year of the Trump Administration, accompanied by record-low
volatility. With
big US stocks
powering higher so dramatically and painlessly, who needed
gold? It tends to rally when stock markets are selling off.
While contrarians were rightfully impressed with gold’s strong
bull-market uptrend since those anomalous post-election lows,
mainstream investors didn’t know or care. Everything was rainbows
and unicorns for them, despite
dangerous bubble
valuations in the stock markets. While gold’s 13.2% rally in
2017 would command attention normally, the 35% to 57% gains in the
FANG stocks overshadowed it and stole the limelight.
There’s no doubt over a year of gold seeing higher lows and higher
highs is very-bullish price action. All students of the markets
would recognize this viewing gold charts. But climbing support and
resistance lines are lost on the financial media and mainstream
investors. Investments only start garnering talk and mindshare when
major new highs are hit. Popular psychology is totally
dependent on that one technical aspect.
Futures speculators view the horizontal $1350 line as key technical
resistance. Gold has tried and failed to break out above it from
several to nearly a dozen times since the summer of 2016 depending
on how you slice such attempts. These guys need to see a decisive
$1350 breakout to really motivate them to buy again. I define
decisive as 1%+ beyond an old technical extreme, or about $1364
in gold’s case today.
That’s just a stone’s throw away, very close. Last week gold closed
near $1352, and this week it was still up at $1349. All gold needs
to see is a couple modest up days of 0.6% to push it back
over $1365 for the first time in 21.3 months! That would work
wonders for sentiment, rapidly turning it to bullish which would
fuel much gold-futures buying. And the speculators currently have
lots of room to buy gold futures.
As
of the latest Commitments of Traders report before this essay was
published, total spec gold-futures longs are only running 25% up
into their past year’s trading range. That means 3/4ths of
these traders’ likely capital firepower remains available to buy
back in. Believe me, if they think gold is going to break out above
$1350 resistance they will flood in with a vengeance. These elite
traders follow charts by necessity.
Every gold-futures contract controls 100 troy ounces of gold, worth
$134,900 this week. Yet these only require traders to keep $3,100
of cash per contract in their accounts. That works out to
absurdly-extreme 43.5x maximum leverage! The legal limit in
the stock markets has been 2x for decades. Traders running at that
crazy limit would lose 100% of their capital risked if gold merely
moves 2.3% against their futures bets.
At
20x leverage that risk is still suffocating, with a 5% adverse move
necessary to wipe out capital risked. So when gold looks to be
breaking out above $1350, these traders will rush to buy to cover
shorts and add new longs. They are well aware gold has formed a
giant ascending-triangle chart pattern over the past couple
years or so. That’s defined as rising lower support compressing a
price into horizontal upper resistance.
When
ascending triangles resolve, it’s usually with a sharp-to-explosive
upside breakout. Once that long-vexing overhead resistance
fails, traders rush back in catapulting the price higher. When gold
breaks out of such a massive ascending triangle,
technically-oriented traders are going to get the heck out of the
way if they are short and rush to ride the breakout on the long
side. Futures speculators live and breathe technicals.
Their coming buying will fuel a far-more-important breakout. To the
financial media and investors, new bull highs are the only
thing that will draw their interest. Before July 2016’s $1365
bull-to-date peak, the last time gold closed over $1365 was way back
in March 2014. So a $1365+ close right now would be a major new
4.1-year high. You better believe that will catch investors’
attention, getting gold back on radars!
A 1%
decisive breakout above $1365 requires $1379 on close. That sounds
lofty since it’s been so long since gold challenged $1400, but it is
merely 2.2% above this week’s levels! When investors start
getting excited about gold again, it takes months or even years to
reestablish meaningful portfolio positions. The vastly-larger pools
of capital they control overpower and dwarf whatever the futures
speculators are doing.
As I
explored a couple months ago, investors are
radically
underinvested in gold today. They will have to shift capital
into gold for a long time to come to reverse this major anomaly.
New gold bull-market highs all alone will prove a powerful motivator
for them. But that will likely be amplified greatly by the
ongoing
stock-market correction. Stock selloffs ignite
big investment
demand for counter-moving gold to diversify portfolios.
If
either speculators buy gold futures or investors buy gold and its
major ETFs led by GLD SPDR Gold Shares in any significant
quantities, gold will absolutely see these major breakouts. And
there’s actually a good probability of that coming to pass in the
next month or so. Gold tends to enjoy
a major seasonal
rally from late March to late May. That ought to be plenty big
to drive gold decisively over $1350 and $1365.
This
should really excite contrarian speculators and investors. While
the gains in gold will be nice, they will be trounced by the
accompanying surge in the gold miners’ stocks. This sector’s
leading benchmark
is the GDX VanEck Vectors Gold Miners ETF. Its technical price
action over this same gold-bull span is shown in this second chart.
While gold is nearing new bull highs, the gold stocks are lagging
far behind.
With
little interest in gold since Trump’s election victory, the gold
miners’ stocks have been abandoned and left for dead. They’ve been
drifting sideways in a vexing consolidation between $21 to $25 in
GDX terms since late 2016. That’s despite their very-strong
fundamentals. In their latest-reported quarter of Q4’17, these
leading gold
miners reported collective all-in sustaining costs averaging
just $858 per ounce!
That’s far below prevailing gold prices, showing this industry is
earning fat operating profits. In Q4’17 gold averaged about $1276
per ounce. In the latest Q1’18 which the gold miners will soon
report on, that surged 4.1% quarter-on-quarter to a $1329 average.
That implies profits of $471 per ounce, which is up 12.7% QoQ
from Q4’17’s results! The gold miners are thriving which stock
prices haven’t recognized yet.
In
Q1’18 GDX’s average price of $22.57 was actually 0.8% lower than
Q4’17’s $22.76! This highlights how deeply out of favor the gold
miners are. But that psychology will reverse dramatically on that
coming major gold breakout. Once gold starts hitting new highs
again, traders will flock back to gold stocks since their mining
profits leverage and amplify gold’s gains. That will drive a
parallel big breakout in major gold stocks.
This
week GDX was languishing near $23, dead-center in its 15.6-month-old
consolidation between $21 support and $25 resistance. It would have
to surge to $25.25 for a decisive breakout that would attract in a
deluge of new capital. That’s 9.9% higher from this week’s levels,
which actually isn’t much at all for this small volatile sector.
Once gold stocks start rallying, they tend to move fast making for
huge gains.
Since gold’s bull market began in mid-December 2015, GDX has
actually seen 55 trading days with 3%+ gains! That’s nearly 1 out
of every 10 trading days over that entire 2.3-year span. The gold
stocks are truly less than a week of decent rallying away from a
decisive breakout of their own. And once they start moving, traders
will rush to buy back in to ride their explosive upside. When gold
is in favor, this sector soars.
In
roughly the same span of this gold bull’s first upleg in the first
half of 2016, GDX skyrocketed 151.2% higher in 6.4 months on the
parallel 29.9% gold upleg. That made for awesome wealth-multiplying
5.1x upside leverage to gold! While gold stocks are
abandoned and forgotten when gold isn’t on traders’ radars, once
they get interested again the gold stocks stage massive catch-up
rallies. The next one is nearing.
The
major gold miners’ early-2016 upleg wasn’t extreme at all
considering the
fundamentally-absurd prices gold stocks were trading at back
then. GDX actually slumped to an all-time low, while the
major gold stocks as measured by their HUI index were at a 13.5-year
low. They were trading at levels last seen in July 2002 when gold
was near $305. So they needed to soar to mean revert out of that
crazy anomaly.
Another massive mean reversion higher is certainly needed today.
Gold first hit this week’s $1350 levels in mid-October 2010. Since
this metal was carving new all-time highs, investors were eager to
buy in for the ride. Back then GDX was trading over $57, or 150%
higher than today’s levels with these same prevailing gold
prices! GDX’s bull-to-date peak in early August 2016 was $31.32, or
just 36% higher from here.
So
there’s a high chance the gold-stock upleg driven by the coming gold
breakout will easily catapult the gold stocks to new bull highs
too. During the last secular bull in gold stocks between
November 2000 to September 2011, the HUI skyrocketed 1664% higher.
There were 11
major uplegs during that span that averaged 81% gains over 7.9
months each! So seeing gold stocks rally 40% or 50% from here is
nothing.
The
gold stocks are truly
a coiled spring
today, ready to explode higher soon and trounce everything else.
They are deeply out of favor, incredibly undervalued, and one of the
only sectors that can rally sharply when general stock markets sell
off. If you want to multiply your wealth this year by fighting the
crowd to buy low then sell high, this small and forgotten contrarian
sector is the place to be. Nothing else rivals it.
While investors
and speculators alike can certainly play gold stocks’ coming
powerful upleg with the major ETFs like GDX, the best gains by far
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The key to this
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The
bottom line is gold is nearing a major bull breakout above $1365.
That will turn psychology bullish and bring traders back in droves.
Gold is rallying ever closer to new bull-market highs as evidenced
by its massive multi-year ascending-triangle chart pattern now
nearing a bullish climax. Today gold is only a couple percent below
that decisive breakout, which will finally blast it back onto the
radars of investors.
That’s likely coming soon, with gold in the midst of its major
spring seasonal rally. Speculators have lots of room to add
gold-futures longs, while investors remain radically underinvested.
And once gold comes back into favor, the abandoned gold miners’
stocks are going to soar. Their prices are far below where they
ought to be based on their fundamentals and prevailing gold levels.
Their upside from here is enormous. | 
