Gold
defied another hawkish Fed decision this week, consolidating high in
its immediate wake. That was an impressive show of strength, after
this extreme Fed tightening cycle hammered gold for a half-year or
so. That strong performance reflects gold-futures speculators’
weakening resolve to keep shorting. With their long-side selling
exhausted, they have massive mean-reversion buying to do which is
super-bullish for gold.
Gold
was looking really good technically heading into this week’s latest
Federal Open Market Committee meeting. Since late September, it had
blasted 11.5% higher in a powerful rebound on big gold-futures
short-covering buying. That catapulted gold back above its key
200-day moving average on FOMC eve, by the most since mid-June.
Gold was a hair away from a decisive 200dma breakout, after escaping
its downtrend.
The
FOMC decision itself wasn’t a surprise, with the Fed hiking its
federal-funds rate by 50 basis points. That was a sharp slowdown
from the streak of monster 75bp hikes executed at its previous four
meetings. The FOMC statement was virtually unchanged from its last
iteration in early November. With this week’s 50bp hike universally
expected, that didn’t faze gold-futures speculators. They focused
on something else.
Once
a quarter after every other FOMC decision, the Fed releases its
Summary of Economic Projections by individual top Fed officials.
This is better known as the dot plot, since it shows where they see
FFR levels heading in the future. Though notoriously unreliable in
predicting where the FFR is actually going according to the Fed
chair himself, traders lap that up. This week it proved more
hawkish than expected.
The
FOMC targets a 25-basis-point range for the FFR, so Fed officials’
projections are at midpoints. In the last dot plot in late
September, they collectively predicted 4.63% exiting 2023. That
means the FOMC targeting 4.5% to 4.75%. Traders expected that
median dot to climb by 25bp to 4.88%, reflecting 4.75% to 5.0%.
Instead it surged 50bp to 5.13%, implying a 5.0%-to-5.25% FFR
target heading into year-end 2023.
To
hit that, the FOMC would have to hike another 75bp after this week’s
50bp. That didn’t seem like a big deal after the Fed’s
ultra-aggressive shock-and-awe campaign of 425 basis points since
mid-March! A normal rate-hike cycle over those seven FOMC
meetings would’ve been 175bp, a quarter point each. So if the Fed
really goes 500bp total, 85% of that is already done. And again the
dot plot is a terrible predictor.
A
year ago after the FOMC’s mid-December-2021 meeting, these same top
Fed officials projected a year-end-2022 FFR at just 0.88%! These
elite central bankers also thought US GDP would surge up 4.0% this
year, while their preferred PCE inflation gauge would climb just
2.6%. They were dreadfully wrong, now seeing the FFR, GDP,
and PCE leaving 2022 at 4.38%, a stall-speed +0.5% economy, and
raging +5.6% inflation!
Still that mere extra quarter-point projected hike really moved
markets. The flagship S&P 500 stock index was up 0.8% heading into
that FOMC decision, but plunged to a 0.6% closing loss in the couple
hours after. Gold was stable near $1,810 leading into it, right at
its prior day’s upleg closing high. Yet despite those hawkish dots,
gold merely dropped to $1,799. Spec gold-futures selling was
muted for a hawkish surprise!
That
was despite these gold-bullying traders’ main cue goading them into
dumping more futures. The US Dollar Index swung from about a 0.4%
daily loss before the FOMC to a 0.2% gain soon after. That was a
sizable rally for the world’s reserve currency. Yet gold soon
recovered from that minor 0.6% loss to flat, then only edged 0.1%
lower on close. Gold defied the hawkish Fed since futures
speculators didn’t dump.
That
was even more impressive given the Fed chair’s surprisingly-hawkish
press conference a half-hour after that FOMC decision. Jerome
Powell didn’t mince words, unloading a double-barreled blast of more
hawkish jawboning. In my line of work I listen to all his pressers
live, and was amazed to hear him be so aggressive after that epic
425 basis points of federal-funds rate hikes in just 9.0 months! He
really piled on.
His
word of the presser was “restrictive”. Powell warned “I’ve told you
today we have an assessment that we’re not at as restrictive enough
stance, even with today’s move.” He led off warning “Restoring
price stability will likely require maintaining a restrictive policy
stance for some time.” On inflation he said “But it will take
substantially more evidence to give confidence that inflation is on
a sustained downward path.”
So
while traders had expected Powell to come across as dovish in his
remarks after such blistering rate hikes this year, instead he
waxed quite hawkish. After past post-FOMC Fed-chair press
conferences with hawkish comments, gold has fallen hard on futures
selling. Yet this week the yellow metal ignored all that to grind
sideways in the FOMC’s wake. That’s very-bullish behavior given
that ugly selloff-spawning setup!
While the data cutoff for this essay is Wednesday, I’m writing it on
Thursday morning. Gold did weaken overnight, but realize both the
Bank of England and European Central Bank did big 50bp hikes early
on Thursday New York time. Since the ECB overall wasn’t as hawkish
as expected, the euro fell hard boosting the US dollar. That was
more responsible for Thursday’s gold-futures selling than the
post-FOMC reaction.
Six
weeks earlier just after the previous FOMC decision, I wrote a bold
contrarian essay arguing that the
Fed’s dollar/gold
shock was ending. The USDX had soared on the Fed’s monster
hikes up to that point, hitting an extreme 20.4-year secular high.
That unleashed
massive gold-futures selling crushing gold sharply lower. I
penned that the day after that last FOMC decision, when gold
languished at $1,631 on close.
With
gold just 0.5% above its panic-grade late-September low after that
fourth monster 75bp FFR hike in a row, my contrarian thesis was
ignored. But as this updated chart reveals, I was correct. The
USDX crumbled after early November’s FOMC decision, fueling enough
big gold-futures short covering to blast gold sharply higher. From
FOMC day to FOMC day, the USDX collapsed 7.5% while gold soared
10.5%!
My
contrarian thesis six weeks ago with gold on the verge of falling to
major new lows was simple. While top Fed officials can spout all
the hawkish Fedspeak they want, the FOMC has limited room to hike
the FFR. At that point it had done an extraordinarily-extreme 375bp
of hiking in just 7.6 months, leaving the target range at a 3.88%
midpoint. That wasn’t very far from the dot-plot terminal FFR of
4.63% exiting 2023.
With
375bp already done and another 75bp predicted as of then, fully
5/6ths of this rate-hike cycle had already passed! With not many
hikes left, I argued then that “the Fed’s ability to keep shocking
the dollar and gold is coming to an end.” I concluded “Their
federal-funds rate is nearing terminal-level projections, leaving
little room for more hawkish surprises.” That was very bearish for
the US dollar and very bullish for gold.
So I
continued then, “Without those to keep goosing the parabolic US
dollar, it is overdue to roll over hard in massive mean-reversion
selling. That weaker dollar will fuel huge normalization buying in
gold futures, which have been driven to bearish extremes.” Though
few believed that was even possible then, that is exactly what
happened since! Gold’s strong performance into and after this
week’s FOMC confirms this thesis.
When
investors’ interest in gold wanes due to insufficient upside
momentum, those hyper-leveraged gold-futures speculators dominate
its price trends. The extreme leverage they run enables them to
punch way above their weights in bullying around gold. Their
trading explains all gold’s volatile price action this year.
And it was heavily influenced by the US dollar’s reactions to 2022’s
many hawkish surprises from the Fed.
That
really started in mid-April after the latest headline CPI inflation
print soared 8.5% year-over-year, arguing for more-aggressive Fed
rate hikes. The FOMC obliged, catapulting the USDX parabolic into a
truly epic 14.3% rally from then into late September! Gold
plummeted a brutal 17.9% in that same span, spurred by the USDX’s
bullish reactions to hawkish Fed surprises. Enormous gold-futures
selling fully drove that.
Speculator gold-futures positioning data is only available weekly as
of Tuesday closes, in Commitments of Traders reports. During that
24 CoT-week span where gold plunged mid-year, specs dumped a huge
145.9k long contracts while short selling another 80.0k. That’s the
equivalent of a staggering 702.8 metric tons of gold selling, far
too much for markets to absorb in that short span! Specs dumped all
that they could.
Despite their extreme leverage via futures, their capital firepower
is quite limited. By late September as gold carved a deep
stock-panic-grade low of $1,623, specs’ total gold-futures longs and
shorts were running 0% and 100% up into their past-year
trading ranges! That’s the most-bullish-possible near-term setup
for gold, indicating probable selling is exhausted leaving room for
nothing but big mean-reversion buying.
Heading into that last FOMC meeting in early November, spec
gold-futures positioning hadn’t changed much. Total spec
longs and shorts were still 4% and 95% up into their past-year
trading ranges. Specs still had massive room to buy longs and buy
to cover shorts, which would drive gold sharply higher. After the
last time spec gold-futures positioning was so extreme in May 2019,
gold rocketed up 21.5% in 3.3 months!
So
with speculators’ selling capacity largely tapped out and the Fed’s
ability to keep hawkishly shocking traders dwindling, gold was due
for some serious gold-futures buying. That’s what catapulted gold
up 10.5% between these last couple FOMC meetings. Interestingly
all that came on the short side of the trade, with specs buying
to cover 60.9k contracts in the last five reported CoT weeks or
189.5 GE tonnes.
Still specs’ short-covering buying isn’t finished, as last Tuesday
their shorts were still 30% up into their past-year range. That
should fall near zero before they are done buying, so about a third
of that short covering is still coming. Gold’s strong performance
after early November’s hawkish FOMC meeting and it again defying
this week’s hawkish encore makes leveraged gold-futures short
selling a heck of a lot riskier!
So
specs are naturally losing their enthusiasm for it. But the reason
I’m writing this essay is what has happened on the long side. Since
early November, as of the latest-reported CoT week total spec longs
have actually slumped 5.6k contracts despite gold surging
sharply higher! That is 17.6t of gold-equivalent selling counter to
gold’s young mean-reversion rally. Spec longs remain just 4% up
into their past-year range!
Shockingly as of last Tuesday, total spec longs were just 0.7% above
their late-September levels when gold bottomed near $1,623! That
was despite gold being much higher at $1,772 that day. Virtually
no long-side buying yet is super-bullish for gold. Spec longs
are proportionally more important than shorts, since longs
outnumbered shorts by an average of 1.9x over this past half-year.
Big long buying is still coming.
To
return to mid-April levels before the Fed’s hawkish surprises
launched the US dollar stratospheric, the gold-futures specs would
have to buy a staggering 144.2k long contracts! And they still have
room for yet another 13.8k of short-covering buying. That adds up
to 491.5t of gold-equivalent buying likely in the next few months,
dwarfing that 189.5t of short-covering buying so far! That would
powerfully accelerate gold’s upleg.
With
gold now defying Fed hawkishness to surge higher between these
latest FOMC meetings, specs are going to get more interested on
betting for more gold upside. Their buying will feed and amplify
that, fueling a virtuous circle of capital inflows. Gold
uplegs have three stages, starting with gold-futures short covering,
extending to gold-futures long buying, which eventually entices in
vastly larger investment buying.
We
are about 2/3rds of the way through stage one, and stage two hasn’t
even started yet! Gold’s young-upleg gains could easily double
to triple over the next half-year or so as speculators return to
longs to normalize their excessively-bearish bets and investors
follow. The biggest beneficiaries of a major gold upleg underway
will be the gold miners’ stocks. They are already surging as this
updated chart shows.
I
analyzed this in depth in last week’s essay on
gold stocks
surging back. The red line is gold, while the blue line is gold
stocks’ leading benchmark the GDX VanEck Gold Miners ETF. At best
between its own panic-grade late-September lows and early December,
GDX has already surged 37.4% higher! That has already amplified
gold’s own parallel gold-futures-buying-fueled mean-reversion upleg
by an excellent 3.2x.
But
this young gold-stock upleg is only getting started if gold
continues powering higher on big spec gold-futures buying. Back in
mid-April before all this Fed-hawkish-surprise carnage in gold, GDX
was trading up near $41. To return to those modest levels alone
would mean another 37.9% rally from this week’s FOMC-day
close. And as I discussed in last week’s essay, gold stocks’ upside
potential is far bigger than that.
All
this matters because cultivating excellent contrarian information
sources is essential to thriving in the markets! If you follow
the mainstream herd in buying and selling, you’ll be doomed to buy
high as greed reigns after major surges then sell low as fear
returns after serious selloffs. Doing it the right way by first
buying low during fear then later selling high in greed requires
fighting the crowd, which is challenging to master.
For
20+ years now we’ve published a couple contrarian newsletters to
help speculators and investors do just that. While I was writing
those essays on gold bottoming including that controversial
early-November one on the
Fed’s dollar/gold
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Their gains are already trouncing the major gold miners dominating
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The
bottom line is gold is continuing to defy a hawkish Fed. After
blasting higher since the last FOMC meeting, gold held strong after
this week’s. Despite the dot plot calling for more rate hikes than
expected and a really-hawkish Fed-chair presser, material
gold-futures selling didn’t erupt. Gold’s surge has left it too
risky to resume leveraged shorting, while speculators’ long-side
capital firepower for selling is exhausted.
Gold’s young mean-reversion upleg is likely to grow much larger in
coming months as specs continue to normalize their
excessively-bearish bets. They have about a third of their likely
short-covering buying left, as well as all their much-larger
long-side buying! Specs are now realizing the Fed’s ability to
hawkishly surprise is ending, with most of this extreme rate-hike
cycle passed. That’s super-bullish for gold and its miners. |