Gold Buying Only Starting – Investment Watch

Guest post by Adam Hamilton from ZealLLC:

Gold has powered higher smartly over the past couple months, achieving big gains.  But this gold buying is just starting, implying this young upleg still has an extended strategy to run yet.  Speculators’ gold-futures buying stays modest, while much-larger identifiable investment buying hasn’t even begun.  Traders could have to increasingly chase gold’s upside momentum to revive normal portfolio allocations, really amplifying its gains.

Gold has been on a tear these days, blasting higher to major technical breakouts.  Between late September to midweek, the yellow metal surged up 15.7% in 3.5 months!  Nearly all those big gains accrued since early November alone, when gold carved a deep double-bottom.  During this young upleg’s rapid ascent, gold shattered its downtrend resistance and 200-day moving average.  Now it’s flashing a potent buy signal.

A strong Golden Cross is going on in gold, with its 50dma crossing back above its 200dma from below!  That is one in every of the most-effective and most-bullish indicators in all of technical evaluation, arguing this young gold upleg is just getting began.  More importantly, gold’s supply-and-demand fundamentals align with and corroborate this rosy outlook.  Impressively the nice majority of usual gold-upleg-driving buying stays!

Major gold uplegs are fueled by three progressively-larger stages, with the latter two ignited by preceding ones.  Uplegs are born and initially driven by gold-futures speculators buying to cover short-side trades.  That soon gives strategy to larger spec gold-futures long buying, which really accelerates gold’s gains.  They ultimately grow sufficiently big to entice investors to return with their vast pools of capital, supercharging gold uplegs.

This specimen’s initial stage-one gold-futures-short-covering buying is about 3/4ths exhausted, which is what has driven gold higher up to now.  But the following stage-two gold-futures long buying is likely only about 1/sixth expended.  And the all-important stage-three gold investment demand stays nonexistent in identifiable form in its primary indicator.  All this argues the lion’s share of gold’s gains are still coming!

The gold-futures speculators control the primary two stages due to the intense leverage inherent in that realm.  That allows their capital to punch way above its weight by way of gold-price impact.  Midweek, each 100-ounce gold-futures contract controlled $187,760 price of gold.  Yet traders were only required to maintain $6,900 money margins of their accounts per contract, allowing crazy maximum leverage of 27.2x!

That dwarfs the stock markets’ legal limit of 2x that has been in place since 1974.  At 27x, every dollar of capital deployed in gold futures exerts 27x the influence on gold prices of a dollar invested outright!  So this gold-futures trading utterly dominates gold’s short-term price motion, especially when investors aren’t energetic.  That has definitely been the case in recent months, with futures doing all of gold’s heavy lifting.

Unfortunately speculators’ collective gold-futures trading activity is just available weekly with a lag.  It’s current to Tuesday closes, but not published until late Friday afternoons within the famous Commitments of Traders reports.  So the latest-available CoT data before this essay was published was merely current to January third.  Gold surged one other 2.0% in the following CoT week, so this buying is inconspicuous some.

This chart superimposes gold and its key technicals over specs’ total longs in green and shorts in red.  It’s current to Wednesday’s close, the info cutoff for this essay.  While gold’s golden-cross buy signal had not quite flashed midweek, it’s on target to trigger Friday after this essay’s release.  Gold is powering higher with a vengeance, mean reverting strongly after mid-2022’s sharp selloff on anomalous events.

 

 

Between early March to late September last yr, gold crumbled 20.9% in 6.6 months technically entering a bear market.  But ranging from an unsustainable geopolitical spike after Russia invaded Ukraine, gold’s selloff was overstated.  Gold initially recovered from that into mid-April, when extreme anomalies sparked snowballing selling.  That accounted for nearly 5/6ths of gold’s total mid-2022 selloff, the overwhelming majority.

The Fed launched into its most-extreme hawkish pivot ever, launching the US dollar stratospheric.  Top Fed officials aggressively hiked their benchmark federal-funds rate an astounding 425 basis points out of a zero-interest-rate policy in only 9.0 months!  They concurrently ramped quantitative-tightening bond selling to its highest levels ever dared by far at $95b monthly!  Such epic tightening was radically unprecedented.

The Fed panicked to fight the raging inflation unleashed by its own extreme money printing.  In only 25.5 months into mid-April 2022, the Fed had recklessly ballooned its balance sheet by an absurd $4,807b or 115.6%!  That effectively greater than doubled the monetary base underlying the worldwide US dollar supply in only a pair years.  Relatively-way-more money was competing for relatively-less goods and services.

That grotesque monetary excess bid prices sharply higher, heavily debasing the US dollar’s purchasing power.  However the US Dollar Index still began soaring, on the huge yield differentials the Fed’s hikes were opening up over other major currencies.  From mid-April to late September, the USDX skyrocketed an astounding 14.3% to an extreme 20.4-year secular high!  That loosed enormous gold-futures selling.

Those gold-futures speculators look to the US dollar’s fortunes for his or her primary trading cue, affirming that gold stays money.  They do the alternative when the dollar makes material moves, selling futures when it’s rallying.  Their trading time horizons are compressed incredibly myopically on account of that extreme leverage they run.  Way up at that crazy 27x, a mere 3.7% antagonistic gold move wipes out 100% of their capital risked!

So over gold’s entire mid-2022-selloff span, speculators dumped 165.5k gold-futures long contracts while adding 66.0k short ones.  That vast 231.5k contracts of total selling was the equivalent of a colossal 720.0 metric tons of gold!  That was far an excessive amount of too fast for markets to soak up, pummeling gold prices sharply lower.  But gold-futures speculators’ capital firepower is sort of finite, so their selling soon ran out of steam.

Gold finally bottomed at $1,623 on September twenty sixth, literally stock-panic-grade levels.  That was a deep and brutal 2.5-year low not seen since just emerging from March 2020’s pandemic-lockdown stock panic!  So as to hammer gold that tough, specs’ total longs plunged to a 3.4-year low while their shorts soared to a 3.8-year high!  Such extremes are never sustainable for long, guaranteeing big mean-reversion buying.

I analyzed that gold-futures puking stalling in mid-October while gold still languished at $1,644.  Back then while gold sentiment remained super-bearish, I concluded “speculators’ extreme gold-futures puking over this past half-year is stalling.  That heavy selling accountable for these anomalously-low gold prices has exhausted these hyper-leveraged traders’ capital firepower. … That guarantees big buying is coming.”

That indeed soon ignited in fast stage-one short-covering buying, triggered by the wildly-overbought US Dollar Index finally beginning to roll over.  When gold has just plunged to deep lows scaring the heck out of long-side traders, the short gold-futures specs are sometimes the one buyers.  With probabilities mounting for a gold V-bounce, they buy to cover and shut their downside bets at fat profits which catapults gold sharply higher.

But that wasn’t enough to persuade the crazy-bearish long-side specs, who continued selling down their overall positioning to a marginal latest 3.6-year low in late November.  So this young gold upleg suffered that double bottom.  But with the USDX’s own overdue mean reversion lower really gathering steam, that gold-futures short covering resumed.  As of that latest CoT data current to January third, it hit 66.5k contracts.

That’s the dominant driver of gold’s 15.7% surge, as spec long buying remained anemic at merely 18.1k contracts.  Together that adds as much as 84.5k contracts of total reported gold-futures buying in gold’s young upleg up to now, the equivalent of 262.8t of gold.  But that remains to be lower than 3/8ths of the huge gold-futures selling that pummeled gold lower in mid-2022.  That means over 5/8ths of likely gold-futures buying stays!

While total spec shorts have already collapsed back down near their rising secular support line, total spec longs remain far below recent years’ resistance around 413k contracts.  So as to climb back as much as those levels which flagged the most important gold peaks since 2020, specs would should buy one other 139.9k longs or 435.1t of gold!  That sort of stage-two buying would catapult gold way higher, really growing this young upleg.

Since speculators’ gold-futures trading often dominates gold price trends, I analyze the newest CoTs in all our weekly and monthly subscription newsletters.  So as to quickly convey specs’ overall positioning in gold futures and its near-term implications for gold prices, I developed an indicator.  It simply looks at specs’ total longs and shorts as percentages of their past-year trading ranges, revealing how far up in they’re.

As of that latest-available January third CoT when this essay was published, spec longs were 17% up into their range while spec shorts were 24% up into their very own.  That implied 3/4ths of likely stage-one short-covering buying had been expended, but fully 5/6ths of stage-two long-side buying remained!  Probably the most-bullish setup for gold is 0% longs and 100% shorts, which shows specs have largely exhausted their selling.

But because spec longs really outnumber shorts, they’re proportionally more essential for gold’s near-term direction.  On average over the past 52 reported CoT weeks, spec longs ran 2.5x higher than spec shorts.  So total spec longs being just 17% up into their past-year trading range is way more significant for gold than spec shorts being 24% up into theirs.  The good majority of stage-two long buying remains to be coming!

With way less gold-futures shorts, stage-one short-covering buying tends to expire of steam inside a number of months.  And that short covering is mandatory, as specs are legally required to purchase contracts to offset and shut their downside bets.  But that frenzied short covering drives gold high enough for long enough to trigger stage-two long buying.  That generally lasts three to 6 months as speculators chase gold’s upside.

Again combining longs and shorts, something on the order of three/8ths of specs’ likely gold-futures buying has passed.  With over 5/8ths still coming, gold has good potential to double the 15.7% gains this young upleg has already enjoyed!  That should prove enough gold upside momentum to start out enticing investors to return.  While they don’t run extreme leverage just like the futures guys, they control vastly more capital.

So their stage-three buying is mandatory to fuel the most important gold uplegs, which might exceed 40% gains.  Two such mighty gold uplegs driven by massive investment buying crested in 2020, at mighty 42.7% and 40.0% gains!  Unfortunately global gold investment demand is way harder to trace than specs’ futures buying, because it is just reported quarterly within the World Gold Council’s excellent Gold Demand Trends’ reports.

However the combined gold-bullion holdings of the dominant American GLD SPDR Gold Shares and IAU iShares Gold Trust gold ETFs offer a great high-resolution proxy for overall gold investment demand.  Reported every day, they reflect American stock-market capital deployed in gold via these mighty ETFs.  Considered over quarters, their holdings closely track and sometimes dominate the WGC’s global-gold-investment trends.

This chart superimposes GLD+IAU holdings over gold and its key technicals lately.  Identical to the previous gold-futures chart, buying and selling over gold’s uplegs and corrections is noted.  But unlike the gold-futures speculators, American stock investors haven’t even began buying gold yet.  Its young upleg hasn’t run high enough for long enough to persuade them to return, so all their stage-three buying remains to be coming.

 

 

Gold-futures speculators’ dominance of gold price motion extends beyond their extreme leverage, for the reason that resulting gold-futures price is gold’s global reference one.  That’s what all traders watch, including investors.  So when heavy gold-futures selling bullies gold lower like in mid-2022, that gold weakness really taints investor psychology.  Thus they joined within the heavy gold selling last yr, although it was irrational.

Gold again plunged 17.9% totally on big gold-futures selling between mid-April to late September.  The futures specs fled because the US dollar shot parabolic on extreme Fed tightening.  But during those six calendar months, headline US Consumer Price Index inflation averaged blistering 8.5% year-over-year surges!  That raging inflation proved the most popular seen by far for the reason that last inflation super-spikes through the Seventies.

Gold skyrocketed during those even in conservative monthly-average-price terms, nearly tripling through the first before greater than quadrupling through the second!  Gold investment demand exploded as that hot inflation relentlessly eroded the US dollar’s purchasing power.  While today’s third inflation super-spike of this contemporary monetary era will ultimately fuel massive gold demand, mid-2022’s extreme anomaly delayed that.

As an alternative of specializing in gold’s super-bullish fundamentals and staying the course, investors fretted about its plunging futures-driven prices.  In order that they fled last yr as gold was hammered lower, as was evident in GLD+IAU holdings.  Between late April to early December, they collapsed 16.7% or 271.3 metric tons.  Naturally investors fleeing from gold’s downside momentum exacerbated it, amplifying the general selloff.

Since investors own gold outright, they don’t have any have to be as high-strung reacting to cost moves as those hyper-leveraged gold-futures speculators.  So toppings and bottomings in gold-ETF holdings lag those in gold itself.  It takes a while after major peaks and troughs in gold to persuade investors trend changes are underway.  During gold’s actual precise 20.9% selloff last yr, GLD+IAU holdings fell 9.0% or 140.9t.

Despite gold blasting 15.7% higher since late September, investors apparently haven’t been impressed.  At best in late December, GLD+IAU holdings had merely recovered a tiny 0.9% or 12.8t off their deep 2.7-year low a number of weeks earlier.  That was also stock-panic-grade, American stock investors hadn’t owned less gold via their preferred trading vehicles for the reason that dark heart of March 2020’s panic!  Speak about irrational.

Due to an unsustainable gold-futures-driven anomaly, investors effectively abandoned gold through the biggest inflation super-spike for the reason that Seventies.  Frightened away by gold’s big mid-2022 selloff, their herd psychology waxed so bearish that they still haven’t began returning.  The large stage-three gold buying that fueled those mighty uplegs peaking in 2020 hasn’t even began yet per GLD+IAU holdings!

American stock investors effectively have zero portfolio allocations in gold today, which is crazy given this backdrop.  Not only is an inflation super-spike underway, however the Fed’s frantic response has forced stock markets right into a deepening bear market.  Yet exiting December, all of the gold held by GLD and IAU was still only price 0.2% of the market capitalization of the elite S&P 500 stocks!  Investors have vast buying to do.

Simply to mean revert GLD+IAU holdings back as much as mid-April-2022 levels before that Fed-goosed-dollar anomaly, GLD and IAU shares would should see enough differential buying to catapult their holdings 19.3% or 262.6t higher.  That’s entering into big-gold-upleg territory, as GLD+IAU holdings soared 314.2t and 460.5t fueling 2020’s massive 42.7% and 40.0% gold uplegs.  And that was with low and benign inflation!

With inflation now raging and stock markets burning, the final word stage-three investment buying on this gold upleg should prove much larger.  Simply to return to October 2020’s record GLD+IAU holdings high of 1,800.5t which seems conservative on this super-bullish environment for gold, one other 437.3t would should be added.  It wouldn’t surprise me to see double or triple that with this inflation super-spike raging.

So this young gold upleg’s stage-one gold-futures short-covering buying is about 3/4ths exhausted, with 1 / 4 still left to go.  The much-larger stage-two gold-futures long buying is just about 1/sixth complete up to now, with the lion’s share remaining.  And the vastly-bigger stage-three investment buying hasn’t even began yet in line with gold investment demand’s best every day indicator.  All that’s wildly bullish for gold prices!

The most important beneficiaries will likely be its miners’ stocks, which really amplify gold’s gains on account of their earnings leverage to its prices.  As of midweek, the leading GDX gold-stock ETF has blasted 45.6% higher at best during gold’s parallel 15.7% upleg.  That makes for good 2.9x upside leverage to gold, on the high side of GDX’s usual 2x-to-3x range.  The larger gold’s upleg grows, the more these gold-stock gains will speed up.

But GDX is dominated by large major gold miners, which aren’t as attentive to gold as smaller mid-tier and junior miners.  The fundamentally-superior ones enjoy much-larger gold-upleg gains, and the trading books of our newsletters are currently stuffed with them added at fire-sale prices surrounding gold’s bottoming.  They’re already beginning to soar with gold, with big unrealized gains in a gold-stock upleg prone to grow huge.

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That holistic integrated contrarian approach has proven very successful, yielding massive realized gains during gold uplegs like this underway next major one.  We extensively research gold and silver miners to search out low cost fundamentally-superior mid-tiers and juniors with outsized upside potential as gold powers higher.  Our trading books are stuffed with them already beginning to soar.  Subscribe today and get smarter and richer!

The underside line is the recent gold buying is just starting.  Gold’s young upleg has up to now mostly been fueled by stage-one gold-futures short covering, which still isn’t finished.  The good majority of larger stage-two gold-futures long buying remains to be coming.  That can eventually drive gold high enough for long enough to persuade investors to return with their vast stage-three buying, growing this gold upleg into the large leagues.

And it should prove a monster with inflation raging uncontrolled in its first super-spike for the reason that Seventies, which can supercharge gold investment demand again.  During times of significant currency debasement, all investors need sizable gold portfolio allocations.  That can require massive buying ranging from virtually nothing.  The gold miners’ stocks will amplify gold’s resulting gains like usual, earning fortunes for traders.

Guest post by Adam Hamilton from ZealLLC.

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