Fed
hawkishness has been the rankling thorn in gold’s side for 18 months
now. Since the Fed started this monster rate-hike cycle, every
material gold and gold-stock selloff has been driven by the threat
of more rate hikes. Those boost the US dollar, triggering
gold-futures selling. But the Fed’s hawkish spell over traders is
waning. Gold and the miners weathered this week’s latest hawkish
FOMC meeting pretty well.
The
Federal Open Market Committee catapulted its federal-funds rate up
an extreme 525 basis points off zero in just 16.3 months into
late July! That blasted the FFR to a lofty 22.4-year secular high
of 5.38%. And this scorching rate-hike cycle was even more violent
internally, with over 4/5ths of it happening in just 9.0 months into
mid-December! The Fed has never before hiked so big and fast from
such low levels.
The
resulting higher US yields ignited a parabolic moonshot in the US
dollar. In just 6.0 months into last September, the benchmark US
Dollar Index skyrocketed 16.7%! The leveraged gold-futures
speculators who dominate gold’s short-term price action closely
watch the dollar’s fortunes for their trading cues, and do the
opposite. So gold plummeted 20.9% in 6.6 months on heavy and
relentless gold-futures dumping!
The
mean-reversion rebounds out of those extreme anomalies were fierce,
with gold fully recovering in a powerful 26.3% upleg over the
subsequent 7.2 months into early May. Since then gold has drifted
lower in a stubborn pullback fueled by dollar bear-market rallies.
My essay last week analyzed this whole
Fed-dollar-gold
dynamic in depth if you need to get up to speed. The latest
FOMC meeting this week builds on that.
After eleven rate hikes since mid-March 2022 including four 75bp
behemoths, the FOMC wasn’t expected to hike again Wednesday with
futures-implied odds near zero. The FOMC statement itself released
after that meeting was virtually unchanged from the prior one in
late July. Traders were far more interested in top Fed officials’
federal-funds-rate projections, which are published quarterly
after every-other FOMC meeting.
This
latest Summary of Economic Projections proved very interesting and
somewhat contradictory. In just one quarter since their last
forecasts, these elite Fed guys more than doubled their 2023 US
GDP-growth outlook to 2.1%. With the economy strong, their expected
unemployment rate this year retreated from 4.1% to 3.8%. They even
saw core PCE inflation excluding energy and food
moderating from 3.9% to 3.7%!
With
continuing disinflation forecast despite a stronger US economy,
you’d think top Fed officials would soften their uber-hawkish
stance. They could project fewer additional rate hikes, or not
holding the FFR as high for as long. But they did neither, with the
2023-year-end FFR forecast staying at the prior dot plot’s 5.63%.
The FOMC views the FFR as a 25-basis-point target range, so dots are
the midpoint average.
That
implied one more 25bp hike later this year, at either the
early-November or mid-December FOMC meetings. Traders had long
expected that, since the mid-June dot plot also showed a 5.63%
FFR exiting 2023. Traders weren’t looking for more-hawkish dots, as
the USDX slumped 0.4% that day leading into that latest SEP. Gold
really outperformed, with nice 0.8% intraday gains to $1,947 before
that FOMC decision.
But
despite no rate hike and no change to year-end-2023 projected FFR
levels, Fed officials still managed to pull a hawkish rabbit out of
their hats. Their year-end-2024 FFR forecast surged 50bp from 4.63%
in mid-June to 5.13% this week! So the previous 100bp of rate cuts
implied next year were slashed in half to 50bp. I didn’t
expect that to change at all, though consensus was for trimming one
of those cuts to 75bp.
As
far as dot-plot surprises go, that was fairly mild. Top Fed
officials’ FFR projections have long been notorious for proving
wrong, as the Fed chair himself often emphasizes in his
post-FOMC-meeting press conferences. So depending on the tenor of
major economic data like jobs, GDP, and inflation during the coming
few months, the next dot plot in mid-December will likely change
again. Projections are always in flux.
There are many examples of dots being far from subsequent reality.
A recent one is the mid-March-2022 SEP accompanying the Fed’s maiden
rate-hike of this cycle. Then top Fed officials expected to see the
FFR leave 2022 and 2023 at 1.88% and 2.88%. Yet merely nine months
later the federal-funds rate was actually running far higher at
4.38% leaving last year, and is again just 25bp away from 5.63%
exiting 2023!
So
the currency and gold-futures speculators who closely watch the dots
should know better than to put too much stock in them. They’ll look
different next quarter and continue to greatly diverge from
the actual FFR trajectory like usual. Yet starting with Wednesday’s
SEP, sizable US-dollar buying erupted fueling gold-futures selling.
The USDX reversed sharply, staging a 0.7% intraday surge into a new
rally closing high.
So
gold dropped from $1,947 leading into the FOMC to a flat close of
$1,931. That still wasn’t bad, much better than other gold plunges
after other FOMC hawkish surprises in the past 18 months or so.
Gold weathered Fed officials implying higher-for-longer with half
the previously-projected rate cuts in 2024 well. And gold-stock
traders didn’t freak out, with the leading GDX gold-stock ETF
climbing 1.1% to $29.71 that day.
The
USDX’s post-dots reversal extended its relentless gains since
mid-July to 5.7%, which is gigantic for a major world currency! Yet
gold continued to
overcome the dollar as it only slumped 1.5% in that same
span. Gold shows relative strength when falling less than the
dollar surges during its material rallies. Often post-FOMC price
trends aren’t apparent until the following day, after foreign
traders have a chance to react.
Both
gold and GDX were weaker Thursday morning as I penned this essay,
dragged down by stock markets falling on higher-for-longer fears.
But again those latest dots shouldn’t be taken too seriously. All
it will take for top Fed officials to pencil in more rate cuts in
2024 is weaker-than-expected jobs reports or
cooler-than-expected inflation ones. We should see some before
mid-December, pushing the dots back lower.
No
matter what the Fed did this week, gold wasn’t likely to plunge
because speculators’ gold-futures positioning remained quite
bearish. This chart is updated from my
gold-shorting-spike-bullish analysis as September dawned. Total
spec longs remained relatively-low while total spec shorts stayed
relatively-high leading into this latest FOMC meeting, leaving way
more room for gold-boosting buying than selling.
The
weekly Commitments of Traders reports current to Tuesday closes
aren’t released until late Friday afternoons. So the latest data
before this essay was published was current to Tuesday the 12th, a
week before the FOMC. Then total spec longs and shorts were running
282.4k and 137.6k contracts, leaving massive room to buy back
futures. Those bearish collective bets were bullish for gold on
mean-reversion buying.
The
first month of the USDX’s recent big surge into mid-August shook
loose huge gold-futures shorting. That left total spec shorts at
their highest levels since early November 2022, early in this large
26.3% gold upleg’s life. Excessive shorts guarantee proportional
near-future buying to cover and close those risky leveraged
downside bets on gold. Spec shorts averaged 94.1k contracts from
late March to early August.
To
mean revert back down to those levels would require 43.5k contracts
of short covering, the equivalent of 135.4 metric tons of gold. Had
top Fed officials not changed their 2024 federal-funds-rate outlook
this week, big gold-futures short covering likely would have
ignited. That quickly becomes self-feeding, as the resulting
surging gold prices pressure more shorts into buying offsetting
contracts to close out their bets.
But
since spec longs well outnumber spec shorts, they are
proportionally more important for driving short-term gold
trends. Over the past 52 CoT weeks, longs have run 2.4x shorts on
average. Spec longs have a well-defined secular trading range, with
lower support near last September’s 247.5k contracts that birthed
this strong gold upleg. Upper resistance in recent years has run
near 413.0k, implying buying exhaustion.
In
that latest pre-FOMC CoT, total spec longs were running just over
1/5th up into that probable gold-upleg trading range. That left
room for 4/5ths of potential buying, another 130.6k contracts
equivalent to a massive 406.1t of gold! Along with likely
short-covering buying that adds up to 541.5t, to easily catapult
gold way higher. That buying will likely accelerate soon as the
FOMC’s ability to hawkishly surprise vanishes.
Again the Fed has already hiked its FFR 525 basis points in the last
18 months or so. Fed officials still see another 25bp at best,
before cuts later next year. So for all intents and purposes this
monster rate-hike cycle is over, 19/20ths finished!
Surprisingly-hot inflation reports could tease out the threat of
more hikes, but they’re unlikely. These multi-decade FFR highs
already risk destabilizing the US government.
This
week its total national debt crossed $33,000b for the first time, a
staggering record! Higher rates due to Fed rate hikes force the
government to issue new Treasuries at higher yields, paying more
interest. At the 0.13% FFR where this monster hiking cycle started,
that makes for just $41b of interest annually. But at the current
5.38%, that skyrockets to $1,774b per year! That would be the
single-largest expense by far.
That
dwarfs the biggest spending category of social-security transfer
payments at $1,240b, and defense at $736b. And the longer the Fed
keeps the FFR high, the greater the likelihood the US economy rolls
over into a serious recession. Top Fed officials sure don’t want to
get blamed for that heading into a key election year. They have
little hiking firepower left, so Fed-hawkish surprises will give
way to Fed-dovish ones.
Those will hammer the still-too-high US Dollar Index, extending its
mean-reversion bear. A weaker dollar will unleash that pent-up
gold-futures buying, rekindling gold’s powerful upleg.
Interestingly its technicals remain great despite recent months’
lingering pullback fueling bearish sentiment. Gold is climbing
again, rallying off major support at its 200-day moving average.
With some futures buying, it will be off to the races.
Gold’s stalled upleg reigniting will fuel big gains in the gold
miners’ stocks. Since their earnings amplify gold price trends, the
majors dominating
GDX tend to leverage material gold moves by 2x to 3x. Like
gold, GDX has suffered a considerable selloff in recent months. But
this strong gold-stock upleg is still grinding higher on balance,
ready to mean revert back up into its uptrend channel as gold prices
recover.
Following gold, GDX also broke down below its uptrend’s support line
on recent months’ massive US Dollar Index rally. But the major gold
stocks’ 200dma failed, which would be ominous if they didn’t just
mirror and amplify gold. Once the yellow metal turns decisively
higher on that gold-futures buying, the gold stocks will follow
leveraging that upside. Within a couple weeks, GDX will shoot back
into its upleg’s uptrend.
When
gold reverses out of mid-upleg pullbacks on gold-futures buying, the
gold stocks just skyrocket. That last happened not long ago, when
GDX soared 34.4% in just 1.2 months into mid-April! A
similar mean-reversion surge from this leading gold-stock ETF’s
latest interim low in mid-August would catapult it back up near
$37. That would be way up into its uptrend channel, nearly
challenging upper resistance.
Gold
blasted 12.6% higher in that same late-February to mid-April
timeframe on big gold-futures mean-reversion buying. So GDX
leveraged its gains over 2.7x, making for a profitable ride.
Another is coming on the same Fed-dovish dollar-hitting
gold-futures-buying dynamic, likely soon. While gold and the miners
are plagued with bearish sentiment now, that will dissipate fast as
gold resumes powering higher again.
After this week’s Fed-hawkish-surprise 2024 dots, gold again closed
at $1,931. That was 2.2% above its dollar-surge-fueled latest
interim low of $1,889 in mid-August, before gold resumed overcoming
the dollar. Few traders seem to realize gold’s nominal
all-time-record closing high of $2,062 from early August 2020 is
already within striking distance. Regaining it would merely
require a total 9.2% mean-reversion rally.
That’s considerably smaller than its spring one following this
upleg’s prior healthy pullback, which actually extended to 13.2%
into early May. Once gold challenges then surpasses new nominal
records, that changes everything for gold and gold stocks.
Bullish financial-media gold coverage will explode, fueling
widespread interest in chasing its gains! Capital inflows will soar
as traders flock back, accelerating the upside.
Ever
since this gold upleg was born a year ago, I’ve argued it should
ultimately best 40%. Up 26.3% at best so far, it is already the
biggest gold upleg by far since a pair of mighty 42.7% and 40.0%
ones both peaking in 2020. 40% gains would carry gold way up near
$2,275, way into new-record-high territory that would
radically increase gold’s attractiveness to traders. GDX should
rally 80% to 120%+ in that scenario.
Again at best its upleg had surged 63.9% in mid-April, but has
slumped back to mere 35.8% gains as of mid-week. To hit 120%, GDX
would have to soar over $48 which is another 62% higher from current
levels! That’s a lot of potential upside, well worth positioning
for. The fundamentally-superior
smaller mid-tier
and junior gold stocks we have long specialized in would see
much-bigger gains than GDX like usual.
So
anyone with a contrarian bone in their body should be salivating at
this opportunity to buy gold stocks cheap before everything
changes. The Fed is done or almost done hiking, so both the USDX
and gold are due to mean revert sharply. Higher gold prices will
fuel big gold-stock gains, particularly as traders start to focus on
new record highs in gold. Great gold stocks could easily double
or triple as this plays out!
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The
bottom line is gold and its miners’ stocks just nicely weathered
another hawkish FOMC surprise. Top Fed officials slashed their 2024
rate-cut outlook in half, extending the US dollar’s massive bear
rally. Yet gold only retreated modestly, with speculators’
gold-futures positioning already quite bearish. Those
gold-price-dominating traders have way more room to buy than sell,
which is very bullish for gold and gold stocks.
With
the FOMC effectively done hiking, hawkish surprises will soon give
way to dovish ones. Traders will be looking for cuts, increasingly
interpreting economic data as justifying them. That will hit the
lofty US dollar, unleashing big gold-futures buying driving gold
much higher. As gold stocks amplify its gains, sector excitement
will mount with new record highs in sight. That will attract lots
of capital, accelerating the upside. |