Gold’s recent pullback looks to be bottoming, despite ongoing
aggressive Fed hawkishness. In recent weeks the yellow metal has
consolidated high, defying aggressive Fedspeak, another big US-jobs
upside surprise, and hawkish rate forecasts from top Fed officials.
This resilience leading right into gold’s major summer-doldrums
seasonal low coincides with speculators maintaining really-bullish
gold-futures positioning.
Gold
was enjoying a strong upleg into early May, powering an impressive
26.3% higher in 7.2 months. But after rapidly surging to $2,050 and
challenging all-time-record nominal highs, gold was really getting
stretched. Trading way up at 1.132x its 200-day moving average,
gold was very overbought. While still under the upleg-slaying
danger zone over 1.160x, a healthy pullback was in order to
rebalance sentiment.
That’s exactly what happened over the next several weeks. Gold fell
5.4% to $1,941, with
very-hawkish
comments from top Fed officials playing a big role. While the
sharpness and magnitude of that mid-upleg pullback was normal, it
succeeded in quickly sapping excessive greed. Herd psychology
decayed back to bearish, as traders soon forgot about gold’s
powerful run leading into that. Gold increasingly fell out of
favor.
Over
the several weeks since that initial selloff low, gold has ground
sideways on balance. And that has been a high consolidation, in the
upper middle of gold’s upleg trading range. So this
pullback’s technical damage has been pretty minor, certainly not
justifying such pessimistic sentiment. But bearishness and apathy
are par for the course in this seasonally-weakest time of the year
for gold, the dreaded summer doldrums.
I
wrote a whole essay last week
advancing this
seasonality-research thread. This chart is updated from that,
normalizing gold’s summer seasonal performances across all modern
bull-market years. Gold’s price action during those market summers
is indexed to 100 as of May’s final closes, recasting it in
perfectly-comparable percentage terms. Gold’s recent early-summer
behavior is tracking seasonal norms.
Gold’s current indexed summer-to-date performance is rendered in
dark blue, drifting sideways to slightly lower. This year gold
exited May at $1,963, and as of mid-week it has averaged $1,956
summer-to-date. Despite all the gold bearishness out there, that is
running only a little under gold’s indexed average from 2001 to 2012
and 2016 to 2022 shown in red. So there’s been nothing unusual
about gold’s recent drift.
After dropping to late May’s initial pullback low of $1,941, gold
revisited $1,942 in early June and $1,944 the day before this week’s
latest Federal Open Market Committee decision from the Fed. So if
$1,940 holds, gold is carving a bullish triple-bottom.
That’s actually impressively resilient considering the recent
Fed-hawkish news flow. Gold has weathered several major
selling-sparking catalysts since early June.
The
first was the latest monthly US jobs report released on Friday the
2nd. That is the granddaddy of all economic reports, really
moving markets when it surprises. Better-than-expected monthly
jobs growth often really slams gold, unleashing heavy gold-futures
selling. Because the Fed has a dual mandate from Congress of price
stability and maximum employment, the US-jobs situation greatly
influences monetary policy.
When
job creation is running high implying an overheating US economy, the
FOMC is more likely to hike its federal-funds rate to temper that.
So federal-funds futures immediately price in higher rate-hike
odds after jobs upside surprises, which fuels sizable US-dollar
buying. Those dollar rallies are what motivate gold-futures
speculators to flee and hammer gold, since it often moves in
lockstep opposition to the dollar.
May’s latest US-jobs print came in scorching hot, with 339k jobs
created almost doubling the +190k Wall Street economists
expected! That was the 12th upside surprise out of the past 13
monthly jobs reports. There were plenty of inconsistencies in that
headline number, which has grown increasingly suspect over the past
14 months or so. One is a gaping divergence between the two surveys
feeding into that report.
Those are the establishment survey of employers and broader
household survey of ordinary Americans. The former yielded that
huge +339k surge, but the latter contradictorily revealed Americans
actually lost 310k jobs in May! Normally these two surveys
track and confirm each other, so big divergences point to likely
manipulation. Starting in March last year, the rest of 2022 saw
this same thing explode near 2.1m jobs!
But
that big headline beat still crushed gold, which plunged from $1,979
leading into that key data to a -1.5% close at $1,948. The higher
Fed-rate-hike odds resulting from that massive upside surprise also
boosted the benchmark US Dollar Index 0.5%. That sizable gold
selling could’ve easily cascaded this time of year when sentiment
waxes so bearish. Yet gold held, and bounced higher in
subsequent trading days.
More
gold-futures selling hit gold on June 7th, pounding it down 1.1% to
$1,942 just above this pullback’s initial low a couple weeks
earlier. The driver was again surging Fed-rate-hike odds, following
a surprise rate hike by Canada’s central bank. After pausing its
own violent hiking cycle in January, the Bank of Canada hiked 25
basis points to a 22-year high of 4.75% warning “underlying
inflation remains stubbornly high”.
Federal-funds-futures-implied rate-hike odds for the FOMC’s next two
meetings in mid-June and late July surged near 30% and 90% on that.
With the BoC resuming rate hikes on inflation still raging, maybe
the Fed would have to keep on hiking. Once again that gold-futures
selling could’ve easily snowballed with such a Fed-hawkish outlook.
But despite gold languishing in the summer doldrums, that didn’t
happen.
The
very next day gold bounced 1.2%, more than erasing that loss to
potentially carve a double-bottom. The gold-futures guys dominating
gold’s short-term price action apparently weren’t motivated to press
its downside momentum. But gold resumed slumping over the next few
trading days leading into the eve of this Wednesday’s FOMC decision,
revisiting $1,944 for a potential triple-bottom for this latest
normal pullback.
The
Fed wasn’t expected to hike this week, and didn’t. After hiking its
federal-funds rate an extraordinary 500 basis points in just 13.6
months during its previous ten meetings, the FOMC finally
paused! Top Fed officials decided to wait to better understand the
lagging impact of their epic rate-hike cycle. But with that widely
forecast, traders were way more interested in Fed officials’ latest
FFR projections than the FOMC statement.
After every-other FOMC meeting or once a quarter, the Fed releases a
Summary of Economic Projections revealing average forecasts of key
economic data by individual top officials. The heart of that is the
dot plot, showing where these guys setting monetary policy expect
the FFR to be exiting coming years. In the previous late-March
installment, that collective year-end-2023 projection ran 5.13%
right at the current FFR.
The
FOMC sets a 25bp target range for this interest rate, which is now
running between 5.00% to 5.25%. This week traders did expect to see
Fed officials add on one more 25bp hike, but they surprised
penciling in two more 25bp hikes by year-end 2023. That
lifted their federal-funds-rate outlook by 50bp to 5.63%. Even
though these projections are notoriously inaccurate for forecasting,
that was still a Fed-hawkish surprise.
That
was probably mostly signaling, Fed officials not wanting to appear
dovish while pausing their violent hiking cycle. But traders still
reacted, bidding the US dollar sharply higher from a pre-FOMC
selloff and pounding gold down from $1,954 to $1,939. But again
impressively gold recovered some to a +0.1% close at $1,945. That
was despite the Fed chair himself waxing hawkish in his post-FOMC
press conference.
In
my line of work I get to listen to all of those live, and I was
amazed how hawkish Jerome Powell proved. He warned that “Inflation
has not really moved down. It has not reacted much to our existing
rate hikes. We’re going to have to keep at it.” He said “...not a
single person on the committee wrote down a rate cut this year, nor
do I think it is at all likely to be appropriate if you think about
it.” Higher for longer was the narrative.
Talk
about a great opportunity to aggressively sell gold futures! Gold
recently suffered that sharp pullback in May, and has mostly ground
sideways a bit above that initial low since. That left gold
psychology pretty bearish in the dark heart of the summer doldrums.
And the FOMC implied it will keep hiking its FFR and hold it high
for the rest of 2023. All that could’ve easily hammered gold 2%+
lower after that hawkish FOMC.
Yet
the yellow metal still looks to be bottoming despite the
Fed. Late May’s initial $1,941 pullback closing low still hasn’t
been breached. Market reactions following FOMC decisions often
aren’t apparent until the end of the following trading day. That
allows foreign traders to react overnight, and then American ones to
fully digest what the Fed is doing. Gold did weaken further in
overseas trading leading into Thursday.
It
had slumped near $1,927 by the time the US trading session rolled
around, which would’ve made for a breakdown. Yet as I pen this
essay midday Thursday, gold has caught a strong bid from American
gold-futures speculators. It has surged as high as $1,960,
fully regaining levels from a few trading days before top Fed
officials forecast two more hikes. Why is gold holding its own
through these big selling catalysts?
The
primary reason is probably speculators’ gold-futures positioning,
which remains bullish for gold. This chart superimposes the
yellow metal’s technicals over specs’ total long and short contracts
reported in the weekly Commitments of Traders reports. These
hyper-leveraged traders who often bully around short-term gold
prices have much more room to buy than sell. They are poised to
flock back in on the right catalyst.
Major gold uplegs are fueled by three sequential stages of buying.
Initially off major lows gold-futures speculators buy to cover
shorts. That stage-one buying is readily apparent early in gold’s
current strong upleg, as spec shorts falling sharply from secular
highs catapulted gold higher in November. That short-covering
buying eventually pushed gold high enough for long enough to entice
bigger long-side specs to return.
That
happened in December, January, and April, blasting gold to new upleg
highs. More short covering flared in mid-March, but stage-two
gold-futures long buying was gold’s main driver to challenge record
nominal highs. Eventually that super-leveraged gold-futures buying
fuels enough upside momentum to entice investors back with their
vastly-larger pools of capital. Their stage-three buying
supercharges gold uplegs.
That
has barely started yet, as evident in the best daily
high-resolution proxy for global gold investment demand. That’s the
combined holdings of the dominant mighty GLD and IAU gold
exchange-traded funds. At best during gold’s entire upleg over this
past half-year or so, GLD+IAU holdings only climbed 4.3% or 58.2
metric tons from mid-March to late May. That’s next to nothing by
major-gold-upleg standards.
Gold’s last comparable uplegs to today’s 26.3%-at-best-so-far both
crested in 2020, at massive 42.7% and 40.0% gains.
Stage-three
investment buying fueled much of those, with GLD+IAU holdings
shooting up 30.4% or 314.2t and 35.3% or 460.5t during them!
Investors love chasing gold upside momentum, which
accelerates and amplifies it. Not much of that has happened yet in
today’s upleg, arguing it is still young.
With
total spec shorts depleting to just 0% up into their past-year
trading range, this gold upleg’s probable stage-one short-covering
buying has been fully expended. But the larger and more-important
stage-two gold-futures long buying has a long ways to run yet. Note
in this chart that spec longs’ upper resistance zone in recent years
has been way up near 413k contracts, around where their
buying firepower exhausts.
As
of the latest-reported CoT when this essay was published current to
June 6th, total spec longs were still way down at just 285.1k
contracts. And they were probably even lower on FOMC eve a week
later, as gold had fallen from $1,963 to $1,944 during this latest
CoT week! That CoT data current to Tuesdays isn’t released until
late Friday afternoons, well after this essay was published. But
spec longs are darned low.
Today’s strong gold upleg was born at deep stock-panic-grade secular
lows in late September, when total spec longs only ran 247.5k
contracts. That left massive room for these leveraged traders to
buy 165.5k contracts before their total longs challenged that 413k
gold-upleg-slaying upper resistance. But as of this latest-reported
gold-summer-doldrums CoT data, total spec longs were merely up 37.6k
since late September.
That
is less than 23% up into that gold-upleg spec-long range, suggesting
a staggering 77% of specs’ likely stage-two gold-futures long
buying remains! Stated another way, specs still have room to
more than quadruple the long buying they’ve already done! That will
start returning on some gold-bullish news catalysts, and feed on
itself growing this gold upleg much larger. Stage-two buying could
resume any day now.
Odds
are waning Fed hawkishness will prove the triggers. The FOMC
has already hiked 500bp, and Fed officials think 50bp more is
coming. If two more 25bp hikes indeed come to pass, fully 91% of
this monster rate-hiking cycle is behind us. If the FOMC keeps
hiking, this cycle will be even closer to ending killing hawkish
jawboning. Traders will increasingly expect rate cuts too, which
usually start soon after hiking cycles.
Major economic data is likely to become more Fed-dovish too. With
mainstream Wall Street economists increasingly questioning those
extraordinary upside surprises in monthly US jobs, their
manipulations will likely shrink. Facing mounting scrutiny, those
dubious hot headline numbers will probably start converging with
other weaker jobs data. That will lead Fed officials to really
throttle back their hawkish Fedspeak.
And
the most-watched US Consumer Price Index inflation gauge should keep
moderating too, adding to the Fed-dovish bent. For eleven
consecutive months now, the monthly year-over-year CPI increases
have shrunk on base effects. The latest May 2023 CPI reported this
week only climbed 4.0% YoY, less than half the red-hot peak soaring
9.1% YoY in June 2022. And that will soon roll off year-over-year
comparisons.
With
price levels surging much higher last summer, coming months’ CPI
increases will shrink off those higher bases. Traders will consider
lower headline CPI prints Fed-dovish, and trade accordingly selling
the US dollar and buying gold futures. Though far-higher consumer
prices aren’t going away, their rates of ascent are really
moderating. Lower inflation reads will also shift Fed officials’
comments more dovish.
So
there’s a good chance gold is bottoming here despite the
hawkish Fed. This healthy gold upleg that is merely seeing another
normal mid-upleg pullback should come roaring back as gold’s
seasonal autumn rally gathers steam. Gold’s summer-doldrums
seasonals buttress this bullish outlook, as their average low came
in mid-June. That was actually June’s 10th trading day, coinciding
with this week’s FOMC meeting!
The
biggest beneficiaries of higher gold prices ahead as this strong
upleg resumes will be gold stocks. The larger gold miners of the
leading GDX
gold-stock ETF tend to amplify gold’s gains by 2x to 3x. The
fundamentally-superior smaller
mid-tiers and
juniors usually fare even better. GDX has already blasted up
63.9% at best in this gold upleg, for 2.4x upside leverage! And
that tends to mount as gold uplegs mature.
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The
bottom line is gold looks to be bottoming despite the hawkish Fed.
The yellow metal has mostly been consolidating high in recent weeks
after a normal mid-upleg pullback. Big gold-futures selling
catalysts failed to break down gold to new lows, including another
massive upside surprise in monthly US jobs and Fed officials
forecasting more rate hikes than expected. Those even hit in the
bearish summer doldrums.
Gold’s impressive resilience through all that likely stems from
speculators’ gold-futures positioning. They still have huge
stage-two long buying left to do, with less than a quarter of that
expended so far. They will increasingly pour into gold futures on
Fed-dovish news, driving gold’s upleg to major new highs in coming
months. As usual gold miners’ stocks will amplify gold’s gains,
building wealth for smart contrarian traders. |