Gold
surged sharply over this past week or so, nearing a major
bull-market breakout! Nearly everyone was surprised by this violent
awakening, which erupted suddenly as gold languished around
year-to-date lows. If this dramatic rally has staying power, gold
has good odds of achieving decisive new bull-market highs. That
would change everything psychologically, ushering gold and its
miners’ stocks back into favor.
Gold
has largely flown under traders’ radars this year, mostly drowning
in apathy. Actually this unique asset had a strong start, climbing
4.6% year-to-date by mid-February to hit $1341. While merely a
10.1-month high, gold was close to a major bull-market breakout.
For several years now, gold has faced stiff resistance around
$1350. It has repelled gold multiple times, looking like an
impregnable Maginot Line.
But
gold’s promising ascent was short-circuited from there, unleashing a
disheartening slump over the next 10 weeks or so. By early May,
gold had retreated 5.2% to $1271. The primary culprit was resurgent
euphoria in the US stock markets. Equity exuberance has long
proven gold’s mortal nemesis. When stock markets are high and
expected to continue climbing on balance, gold investment demand
often withers.
The
recent gold action can’t be understood without the context of the US
stock markets as represented by their flagship S&P 500 index (SPX).
Heading into last September, the SPX was marching to a series of new
all-time record highs. Since gold tends to climb when stock
markets sell off, there was little demand for this essential
portfolio diversifier. Why buy gold when stocks seem to do nothing
but rally indefinitely?
That
who-cares sentiment helped fuel
all-time-record
short selling in gold futures, hammering gold down to $1174 in
mid-August for a 19.3-month low. Stuck in the shadows of euphoric
stock markets, gold largely drifted sideways from there averaging
$1197 until early October. But on October 10th, hyper-complacent
stock traders were finally confronted with a serious selloff as the
SPX plunged 3.3% that day alone.
Earlier hawkish comments from the Fed chairman were to blame. With
stock markets bleeding, traders remembered gold. The world’s
leading and dominant gold exchange-traded fund is the GLD SPDR Gold
Shares. According to the latest data from the venerable World Gold
Council, GLD’s 784.3 metric tons of gold bullion held in trust for
its shareholders at the end of Q1’19 represented 31.6% of global
gold ETFs’ total.
In
early October with the SPX just fractionally under its recent record
peak, GLD’s holdings slumped to a deep 2.6-year secular low
of 730.2t. But a few trading days later as the SPX’s sudden and
sharp plunge started to kill complacency, GLD enjoyed a big 1.2%
holdings build. When stock traders buy GLD shares at a faster pace
than gold itself is being bought, GLD’s managers equalize that
excess demand by buying gold.
That
SPX selloff snowballed into a severe near-bear correction, down
19.8% by Christmas Eve. With the stock markets burning, investors
remembered the timeless wisdom of prudently diversifying their
stock-heavy portfolios with counter-moving gold. It had rallied
8.1% in 4.3 months by the time a super-oversold SPX was ready to
bounce. That gold upleg kept growing, ultimately extending to 14.2%
gains by mid-February.
But
as gold neared that major $1350 bull-market breakout then, stock
euphoria came roaring back with a vengeance. The SPX had rocketed
18.2% higher out of its correction low by then, fueled by a radical
shift back to dovishness by the Fed! It completely capitulated and
caved to the stock markets, declaring that its
quantitative-tightening monetary policy was open for
adjustment in contrast to earlier statements on QT.
By
that point the SPX had regained nearly 3/4ths of its total
correction losses, so exuberant-again traders started to forget
gold. Gold investment demand peaked in late January the day before
the Fed gave in on QT, capping a 12.8% GLD-holdings build over 3.8
months. The higher the SPX rallied in recent months, the greater
stock euphoria grew and the more gold was forgotten. Yet again
stock euphoria
stunted gold.
The
SPX peaked at the end of April at another new all-time-record high.
That extended its total monster-bounce rebound rally since late
December to a colossal 25.3% in 4.2 months! A couple days later in
early May with the SPX still near records, gold fell to that $1271
YTD low. Euphoric stock investors’ exodus from gold persisted
another week, when GLD’s holdings slumped to 733.2t. That was down
11.0% in 3.3 months.
Gold
failed to break out above its years-old $1350 resistance zone in
mid-February because skyrocketing stock markets forced it
back out of favor. Between late January and mid-May, fully 97% of
GLD’s holdings build fueled by the SPX’s severe near-bear correction
largely in Q4 had been erased! Just like late last summer, gold was
again hostage to lofty euphoric stock markets. Investors wanted
nothing to do with it.
But
the SPX started rolling over again in May, slowly at first. It was
shoved after Trump got fed up with China backtracking on nearly a
year’s worth of trade negotiations with the US. On May 5th he
warned that tariffs on $200b of annual Chinese imports would blast
from 10% to 25% going effective the following Friday. That
gradually drove the SPX lower into mid-May, including serious 1.7%
and 2.4% down days.
So
once again just like in October the last time the SPX rolled over
hard, gold caught a bid. It rallied back up to $1299 in mid-May as
investors again remembered stock markets can also fall.
GLD’s holdings began modestly recovering as stock-market capital
started slowly migrating back into gold. But that nascent trend
reversed again in mid-May as stock markets bounced sharply higher,
unleashing surging euphoria.
The
primary driver of gold in recent years has been stock-market
fortunes. Gold often falls out of favor when stock markets are
high and rallying, then starts returning to favor when they sell off
again. In a very real sense gold is the anti-stock trade. While it
doesn’t only climb when stock markets weaken, that’s what mainstream
investors remember gold for. Its investment demand is rarely strong
near stock-market highs.
So
gold again slumped back near $1273 by late May as the SPX rebounded,
further demoralizing the few remaining contrarians. This metal felt
pretty hopeless heading into its
summer doldrums,
its weakest time of the year seasonally. Then a Trump bombshell
shocked stock traders out of their complacency. He warned the US
was levying escalating tariffs on all Mexican imports to
force Mexico to fight illegal immigration!
Last
Friday May 31st was the first trading day after that surprise, and
the SPX fell 1.3% to its lowest close since its all-time-record peak
a month earlier. That extended its total recent selloff to 6.6%, so
worries mounted. Gold had closed at $1288 in the prior day’s US
trading session. Overnight after Trump’s tweet on Mexico tariffs
gold rallied to $1297. That upside continued in the US, with gold
closing 1.3% higher at $1305.
$1300 is a critical psychological line, heavily coloring sentiment
especially among hyper-leveraged gold-futures speculators. They
tend to buy aggressively when gold regains $1300 from below, and
sell hard when gold breaks under $1300 from above. But while
gold-futures trading
heavily
influences short-term gold price action, only sustained
investment buying can ultimately
grow gold uplegs
to major status.
GLD’s holdings are the best daily proxy available of gold investment
demand. And last Friday when gold surged, GLD merely saw a small
0.3% holdings build. American stock investors weren’t buying gold,
it was the gold-futures speculators. These traders control far-less
capital than investors, so their available buying firepower to push
gold higher is limited. Gold uplegs never reach potential without
investment demand.
The
Asian markets were closed last Friday as gold rallied back over
$1300 in the States. So when they opened again this past Monday
June 3rd, Asian traders piled on to the gold buying. By the time
the US stock markets neared opening that day, gold was already up to
$1317 in overnight trading. Once again that global momentum carried
into the US session, helping gold surge another 1.5% higher
to $1325!
While great to see, that was still just a 3.2-month high. Without
investment demand, gold’s new surge was unlikely to last very long
on gold-futures buying alone. But something big changed that day in
the US markets. American stock traders, which had mostly shunned
gold since late January, took notice. They started shifting capital
back into gold via GLD shares in a major way, driving a huge 2.2%
build in its holdings!
That
was the biggest single-day percentage jump in this leading gold
ETF’s holdings in 2.9 years, since early July 2016. That happened
to be soon after the UK’s surprise pro-Brexit vote, when gold soared
on the resulting uncertainty. While one day doesn’t make a trend,
such a massive shift in gold investment buying is definitely
attention-grabbing. If investors continue returning on balance,
gold is heading way higher.
As
this chart shows, gold is now within easy striking distance of a
major bull-market breakout! It is not only nearing that vexing
$1350 resistance zone, but has a high base from which to launch an
assault. If gold-investment demand persists, gold doesn’t have far
to run to hit new bull-to-date highs. Of course further
stock-market weakness on balance would greatly help, but it’s not
necessary with new-high psychology.
Blinded by apathy, not many traders realize gold still remains in
a secular bull market. It was born from deep 6.1-year secular
lows in mid-December 2015, the day after the Fed’s first rate hike
in its latest
tightening cycle. Over the next 6.7 months gold soared 29.9%
higher in a massive upleg, entering new-bull-market territory at
20%+ gains. That left gold very overbought, so it crested at $1365
in early July 2016.
After strong bull-market uplegs big corrections are totally normal
to rebalance sentiment, bleeding off the excessive greed at
preceding highs. Gold consolidated high just under $1350 after that
initial upleg, then fell to its 200-day moving average. It had
resumed rallying in October 2016, but reversed sharply after Trump’s
surprise election victory in early November. That pivotal event
indirectly forced gold into a nosedive.
Gold
plummeting in that election’s wake was the result of incredible
euphoria, or Trumphoria at that time. Trump not only won the
presidency, but Republicans controlled both chambers of Congress.
So stock markets soared on hopes for big tax cuts soon. The
SPX surged dramatically higher on truly-epic levels of euphoria,
which in turn battered gold. Most investors shun gold when stock
markets look awesome.
That
greatly exacerbated gold’s normal correction to a monster 17.3% over
5.3 months! While very ugly and miserable, that remained shy of the
20%+ selloff necessary to qualify as a new bear market. Thus gold’s
bull remained alive and well, albeit wounded by such a
serious loss. Still gold recovered to power 20.4% higher over the
next 13.3 months into early 2018, despite the SPX continuing to soar
dramatically.
In
late January 2018 gold peaked at $1358 just a couple days before the
SPX’s own extremely-euphoric all-time-record high. While stock
euphoria stunts gold investment demand, gold can still rally in
lofty stock markets if it has sufficient capital-inflow momentum.
But unfortunately buying was exhausted, then gold again consolidated
high just under $1350 like it had done a couple summers earlier. It
couldn’t break out.
A
few months later gold was beaten down into another 13.6% correction
over 6.7 months. It started on a sharp rally in the US dollar,
which motivated gold-futures speculators to sell aggressively. Then
the gold downside persisted on
investors exiting
as the SPX marched back up towards record highs after a
sharp-yet-shallow-and-short 10.2% correction in early February 2018.
Gold apathy and despair flared again.
But
gold bottomed late last summer as extreme
record
gold-futures shorting exhausted itself, and started recovering
higher again. That young upleg really accelerated when the SPX
rolled over into that severe near-bear correction largely in Q4’18.
That extended gold’s latest gains to 14.2% over 6.1 months as of
that latest major interim high of $1341 in mid-February. Check out
this gold bull’s resulting entire chart pattern.
After a strong start hitting $1365 several summers ago, gold
couldn’t punch through to new bull highs. It tried several times,
but stock-market euphoria and heavy gold-futures selling on
US-dollar strength kept batting it back down. Although gold
couldn’t make new-high progress, it did carve a nice secular series
of higher lows. While higher lows aren’t as exciting and
attention-grabbing as higher highs, they are very bullish.
Flat
highs combined with rising lows have created a gigantic
ascending-triangle technical formation in gold over the past
several years. That’s very clear above, gold coiling ever-tighter
between climbing lower support and horizontal upper resistance.
Ascending triangles are bullish chart patterns that are usually
resolved with strong upside breakouts. Gold has spent recent years
being accumulated behind the scenes.
No
new bull-market highs along with gold being overshadowed by the
stock markets surging to their own all-time-record highs in recent
years has left this gold bull in stealth mode. Few investors
realize it is still underway, and nearing a major bull-market
breakout. But once that process become apparent, gold will quickly
return to radars and become big financial news. Then gold
enthusiasm will rapidly mushroom.
Any
close over that vexing multi-year $1350 upper-resistance line will
catch attention. But gold will have to break out decisively
above there, exceeding $1350 by 1%+, to really attract the
limelight. That would be $1364 gold. This Wednesday at the data
cutoff for this essay, gold closed at $1331. That only left another
2.4% to climb to hit that decisive-breakout level. That’s trivial
when investment capital is returning.
This
gold bull’s first two uplegs averaged 25.2% gains. Today’s third
upleg only ran 14.2% back in mid-February before the monster
stock-market bounce’s extreme euphoria temporarily derailed it. All
it would take for gold to extend to that key $1364 level is for this
upleg to grow to 16.2%. That would still be modest, well behind the
first two uplegs’ 29.9% and 20.4% gains. A decisive breakout is
very close from here!
And
once gold heads over its $1365 bull-to-date peak of July 2016, gold
investment will start becoming popular again. Financial-media
coverage will explode, and be overwhelmingly positive. Investors
love chasing winners, and nothing motivates them to buy more
than new bull-market highs. We’ve seen that in spades in the stock
markets in recent years. Major buying from highs often becomes
self-feeding.
The
virtuous circle of inflows driven by new-high psychology can get
very powerful. The more gold rallies, the more traders want to buy
it to chase the momentum. The more they buy, the faster gold
rallies. Gold hasn’t enjoyed positive capital-inflow dynamics like
this since summer 2016. The potential gold upside from here as this
unique investment returns to favor is big, supported by key
tailwinds not enjoyed in years.
Starting from mid-August’s deep gold low, 20% and 30% total uplegs
would catapult this metal way up to $1408 and $1526! Major new
bull-market highs in gold would happen with a backdrop of
dangerously-overvalued stock markets rolling over, greatly
increasing the investment appeal of gold. And since the SPX is
unlikely to keep surging to more record highs, stock euphoria
shouldn’t arise to retard gold’s ascent.
The
amount of gold buying investors need to do is staggering, as they
are radically underinvested. Every investor needs a 10%
portfolio allocation in gold and its miners’ stocks, period. Their
current allocations to gold are virtually nonexistent per the
leading proxy. For Americans it is the ratio between the total
value of GLD’s gold-bullion holdings and all 500 SPX stocks’
collective market capitalizations. This is super-low.
At
the end of April at the SPX’s latest peak, its stocks commanded a
total $26,048.3b market cap. That is colossal beyond belief.
Meanwhile GLD’s 746.7t of gold that day were only worth $30.8b at
$1283. That implies American stock investors had a gold portfolio
allocation around 0.12%, effectively nothing! Merely to
boost that to even 0.5%, their gold holdings would have to
quadruple. There’s vast potential for gold buying.
Another thing going in gold’s favor is the high US-dollar levels.
Its leading benchmark the US Dollar Index hit 23.3-month highs in
late April, then revisited those levels in late May. Gold-futures
speculators tend to sell gold on a strengthening dollar and buy gold
on a weakening dollar. The dollar is likely to drift lower in
future months too, adding to gold’s momentum. The high dollar irks
the Trump Administration, hurting US exports.
So
gold is nearing a major bull-market breakout that will change
everything, wildly improving investors’ gold outlook and thus
investment demand! The main beneficiary of higher gold prices will
be the stocks of its miners. This chart shows the same gold-bull
timeframe in the leading GDX VanEck Vectors Gold Miners ETF. I
analyzed the latest
Q1’19 fundamental
results from its miners in depth just several weeks ago.
This
essay is focused on gold so I’ll discuss gold stocks in a future
one. For our purposes today, note how GDX is positioning for a
major breakout of its own above years-old $25 upper resistance.
So far GDX’s current upleg is only 33.0% higher at best, small for
this volatile high-potential sector. When gold powered 29.9% higher
in essentially the first half of 2016, GDX amplified its gains with
a monster 151.2% upleg!
So
with gold on the verge of a major bull-market breakout, the
beaten-down gold stocks are the place to be to greatly leverage
gold’s upside. Since the gold-stock ETFs are
burdened with
underperformers at higher weightings, the best gains will be won
in individual gold stocks with superior fundamentals. The kind of
upside they can accrue during major gold uplegs is amazing, really
multiplying wealth rapidly.
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, their prices remain relatively low with big upside
potential as gold rallies!
If
you want to multiply your capital in the markets, you have to
stay informed. Our newsletters are a great way, easy to read
and affordable. They draw on my vast experience, knowledge, wisdom,
and ongoing research to explain what’s going on in the markets, why,
and how to trade them with specific stocks. As of Q1 we’ve
recommended and realized 1089 newsletter stock trades since 2001,
averaging annualized realized gains of +15.8%! That’s nearly double
the long-term stock-market average.
Subscribe today
for just $12 per issue!
The
bottom line is gold just surged near a major bull-market breakout.
The $1350 resistance zone that has vexed gold for years is once
again within easy range. All it will take to drive gold to new bull
highs over $1365 is sustained investment buying. And that’s not a
tall order with the stock markets starting to roll over again after
record highs. GLD just enjoyed its biggest daily build in several
years this Monday.
Once
gold gets to new bull-market highs, psychology will shift rapidly in
its favor. Gold financial-media coverage will soar, and will be
overwhelmingly positive. This will motivate investors and
speculators alike to shift capital back into gold to chase its
upside momentum. The potential gold and gold-stock gains with
sentiment turning favorable are massive. It’s best to get deployed
before gold’s breakout unleashes this. |