A
new major upleg is underway in gold, which should easily achieve new
all-time-record highs. That will greatly boost investor interest
and capital inflows into this leading alternative asset. Despite
gold’s sharp V-bounce, speculators’ gold-futures positioning remains
really bullish. Their huge normalization buying still coming ought
to drive gold high enough for long enough to attain records and
attract back investors.
In
just the last several weeks, gold has exploded 8.8% higher to $1,980
as of Wednesday! That blistering mean-reversion rebound followed a
violent breakdown.
Gold had been near $1,931 leading into the late-September FOMC
meeting. While top Fed officials didn’t hike rates again, they did
slash their year-end-2024 rate-cut forecast in half to 50
basis points. That hawkish surprise unleashed big US-dollar buying.
Over
the next couple weeks the benchmark US Dollar Index surged 1.8%
higher, extending its massive bear rally since mid-July to 7.3%.
Gold wilted as the dollar surged, plunging 5.3% in that span. The
gold-futures speculators who dominate gold’s short-term price action
look to the dollar for their primary trading cues. Gold dropped as
low as $1,820 in early October, knifing below an important technical
milestone.
Like
all secular bull markets, gold’s meander through upleg-correction
cycles. Its last upleg powered a big 26.3% higher over 7.2 months
into early May. Uplegs crest because herd greed grows excessive and
sucks in all available near-term buyers. Subsequent selloffs are
necessary to rebalance sentiment and technicals. They are
classified as either pullbacks or corrections, with the dividing
threshold running 10%.
Before late September’s hawkish 2024 dots, gold’s total selloff was
7.9% at worst. That was still pullback-grade, meaning gold’s upleg
was technically intact. But as that post-hawkish-surprise selloff
mounted, gold edged into formal 10%+ correction territory as October
dawned. A few days later, gold’s total selloff extended to 11.3% as
that recent nadir was hit. Gold rolling over into a correction
reset its upleg cycle.
That’s a big deal technically. Since pullbacks are mid-upleg
rebalancings within still-running uplegs, they don’t reset potential
upleg gains. At that 26.3% in early May, gold’s latest upleg was
already quite large. It could’ve grown bigger still, as a pair of
monster gold uplegs crested up 42.7% and 40.0% in 2020! This latest
upleg challenging those mighty 40%ish gains was probably its
best-case upside scenario.
And
that would’ve been awesome had that gold upleg not been prematurely
truncated by the Fed. A 40% upleg off late September 2022’s deep
stock-panic-grade $1,623 low would’ve catapulted gold back up near
$2,275. That would’ve been way into nominal-record-high
territory, way exceeding gold’s August 2020 all-time closing
peak of $2,062. Besting that would’ve required a marginally-bigger
27.0% total upleg.
But
this latest hawkish-Fed-induced gold correction formally slayed that
last upleg, so a new one was just born a few weeks ago. And that
started from a much-higher base of $1,820. From there gold would
only need to rally a modest 13.3% to achieve new record closes,
which is just a small upleg by gold standards. And as of midweek,
gold’s sharp mean-reversion bounce has already covered fully
2/3rds of that ground!
New
nominal record closes are merely 4.1% higher from here, which
is within spitting distance. Since its latest bottoming, gold has
enjoyed big daily rallies of 1.8%, 3.2%, 1.4%, and 1.3%. A few more
up days like these will start writing gold into the record book.
That will change everything for gold psychologically, starting to
attract in legions of new investors. They love chasing winners with
strong upside momentum.
As
an alternative asset, gold usually flies under the radars of most
investors. But bullish financial-media coverage of gold will
explode as it challenges and hits new record closes. That will
quickly spread awareness of gold’s young upleg, and increasingly
stoke widespread greed. The resulting big investment capital
inflows will become self-feeding. The more investors buy, the
higher gold rallies, the more they want to buy.
That
has great potential to ultimately grow this new major upleg into a
monster rivaling 2020’s 40%+ ones. Gold hasn’t enjoyed strong
investment demand since then, with gold investors
largely missing
in action in recent years. A 40% upleg from gold’s recent lows
would leave it way up near $2,550! The long string of new
record highs between $2,062 and there would fuel great investor
enthusiasm for reallocating into gold.
Today’s young gold upleg has very-high odds of growing into major
status over 20% gains because of how gold uplegs are fueled. They
are driven by three distinct sequential stages of buying. The first
is gold-futures short-covering buying, the second gold-futures long
buying, and the third investment buying. These are telescoping,
growing increasingly larger and requiring the prior stage’s gold
gains to ignite them.
Despite gold’s scorching V-bounce in recent weeks, the stage-one
gold-futures short covering isn’t even expended yet. And the
much-bigger stage-two gold-futures long buying has barely even
started! Later the enormous stage-three investment buying will
ignite off super-low base levels, portending massive gold upside.
This chart reveals how both types of speculators’ gold-futures
buying have stacked up in this upleg.
Gold
is superimposed over total spec longs and shorts published in the
weekly Commitments of Traders reports. This data current to Tuesday
closes isn’t released until late Friday afternoons. So the latest
CoT data available when this essay was published was as of October
17th. Gold closed at $1,922 that day, and has blasted much higher
to $1,980 since. So specs have done more buying than this
chart shows.
With
investors mostly abandoning gold in recent years, spec
gold-futures trading has driven all its uplegs and corrections.
All are noted here, along with the changes in spec longs and shorts
that fueled them. In gold’s last powerful 26.3% upleg into early
May, specs added 54.9k long contracts while buying to cover another
87.3k short ones. That added up to gold-equivalent buying of 442.2
metric tons, which is quite large.
And
the main reason gold fell 11.3% in that new correction since into
early October was specs dumped 36.3k longs while adding 69.3k
shorts. That combined for a hefty 328.5t of gold-equivalent
selling! So it is no wonder gold plunged into that recent violent
breakdown, specs were selling gold futures like crazy. Due
to the extreme leverage inherent in that realm, gold-futures trading
has an outsized price impact on gold.
This
week each contract controlling 100 ounces of gold only required
traders to maintain low $7,800 cash margins in their accounts. Yet
at midweek gold prices near $1,980, each contract had a notional
value way up at $197,980. That enables extreme maximum leverage up
to 25.4x, which makes each dollar traded in gold futures 25x more
potent in bullying around gold prices than a dollar invested
outright!
Gold’s latest plunge after Fed officials upped their year-end-2024
federal-funds-rate projections was mostly fueled by an enormous
gold-futures shorting spike. In just three CoT weeks, specs
short sold a massive 45.7k contracts catapulting their total shorts
way up to 174.4k! That’s extreme by any standards, almost matching
the 3.8-year secular high of 185.3k in late September 2022 that
birthed gold’s last 26% upleg!
Excessive shorts weren’t sustainable then, and they aren’t now.
Shorting gold futures at maximum leverage is exceedingly risky. At
25x, a mere 4% gold move against specs’ bets wipes out 100% of their
capital risked! So they can’t afford to be wrong for long. Once
gold bounces decisively for any reason, they rush to buy to cover to
close those downside bets. That buying stampede just started in
mid-October.
In
that last-reported CoT week ending October 17th, specs covered an
utterly-colossal 30.1k contracts! That ranked as the 9th largest
on record out of 1,294 CoT weeks since early 1999!
Interestingly that was very similar to early-October-2022’s initial
29.2k of single-CoT-week short-covering buying that ignited gold’s
last 26% upleg. This latest frenzied and frantic short covering is
why gold V-bounced sharply higher.
The
secular support zone for total spec shorts is around 95k contracts.
From late March to early August, spec shorts were right there
averaging a tight 94.1k. This latest shorting spike didn’t erupt
until Fed-hawkish economic data soon revised lower ignited a
gigantic US-dollar bear rally. Today’s stage-one gold-futures
short-covering buying should run until spec shorts mean revert back
down near their 95k support.
That
left 49.3k contracts of more room for covering as of October 17th.
But a sizable-to-big chunk of that had to happen in this latest
not-yet-reported CoT week ending this Tuesday, since gold soared a
big 2.6% higher within it. I’d bet about 35k contracts are left,
but we can conservatively assume 30k. That is fully as much
short-covering buying likely still coming as during that initial CoT
week that catapulted gold higher.
It
is only a small group of traders willing to flirt with ruin shorting
leveraged gold futures, and they don’t command much capital. So
their stage-one short-covering buying quickly burns out, usually in
several weeks or so. But that ignites uplegs, driving gold high
enough for long enough to start enticing back way-larger spec
gold-futures long buying. Over the last 52 CoT weeks, total spec
longs outnumbered shorts by 2.5x.
So
stage-two gold-futures long buying is proportionally larger,
accelerating young gold uplegs. As of that latest-reported October
17th CoT, total spec longs were still down near 272.3k contracts.
That’s on the lower side of their secular trading range, and not too
far above late November 2022’s deep 3.6-year secular low of 243.1k.
The upper resistance zone for total spec longs in recent years has
run near 413k contracts.
Speculators have massive room to buy back longs before they
near those exhausted gold-upleg-slaying levels. That’s an enormous
140.7k contracts higher than October 17th levels, which equates to a
gigantic 437.7t of gold-equivalent buying! But specs probably did
sizable-to-large long buying in this newest CoT week to this Tuesday
not yet reported. Conservatively they probably now have at least
125k contracts left to do.
Add
together 30k of likely remaining stage-one short covering and 125k
of stage-two long buying, and we are looking at gold-futures
speculators having 482.1t of probable buying firepower left!
Remember gold’s entire last 26% upleg into early May was fueled by a
smaller 442.2t of gold-equivalent spec gold-futures buying. So
gold’s new major upleg powering another 25% higher to $2,275 doesn’t
look like a stretch at all.
Again that would propel gold way up into new-record-high territory
way above that old $2,062 peak. The financial media would
breathlessly cover that, fanning up widespread popular greed
attracting back much investment capital. That stage-three
investment buying ought to supercharge this gold upleg, potentially
lifting it into monster ranks over 40% gains. Investors have all
but abandoned gold, they could do epic buying.
Global gold investment demand is only published quarterly by the
World Gold Council in its excellent Gold Demand Trends reports. But
a great daily high-resolution proxy for that is the combined
gold-bullion holdings of the world’s largest gold ETFs, the mighty
American GLD and IAU. Unbelievably just last week, those slumped to
an extreme 3.8-year low even under March 2020’s in the
pandemic-lockdown stock panic!
Gold
is so deeply out of favor that investors want nothing to do with
it. Another proxy for American stock investors’ gold portfolio
allocations confirms that. Exiting September, all the elite S&P 500
stocks had a collective market capitalization of $38,218.4b. Yet
the gold-bullion holdings of both GLD and IAU were merely worth
$77.1b. That implies American stock investors have just 0.2% of
their assets invested in gold!
For
all intents and purposes, that’s essentially zero. Investors
are going to remember gold as it forges into new record-high
territory soon, and start chasing its upside. The most-powerful
gold uplegs are fueled by big stage-three gold-investment demand.
The 42.7% one cresting in March 2020 right before that stock panic
was partially driven by GLD+IAU holdings soaring 30.4% or 314.2t.
The next one was even better.
After that anomalous unsustainable stock-panic selloff similar to
gold’s recent violent breakdown, gold soared 40.0% into October
2020. Investors flocked back in droves as gold achieved new record
highs, with GLD+IAU holdings skyrocketing another 35.3% or
460.5t! Another huge 30% build off the recent
early-October-2023 gold-low levels would equate to 383.4t, and
that’s on top of all that gold-futures buying.
So
gold’s new upleg is almost certain to grow into major status because
there’s still likely around 482t of gold-equivalent gold-futures
buying and 383t of gold investment buying left. That adds up to
a vast 865 metric tons! But again I’d guess this is too
conservative. As gold challenges and bests new nominal record
highs, demand should explode as speculators and investors alike rush
to chase it and ride its big gains.
Gold’s new major upleg should easily hit 25% gains, and probably
40%, before giving up its ghost. But gold only needs to rally about
4% from here, or 13% in total-upleg terms, to start carving new
record highs. Those should change everything sentimentally,
igniting and fueling gold demand like hasn’t been seen for years.
The battered gold stocks will be the biggest beneficiaries of gold’s
new upleg stoking popular greed.
The
major gold miners of the leading GDX ETF tend to amplify material
gold moves by 2x to 3x. And they are likely to
achieve record
profits growth in their imminent Q3’23 earnings season,
attracting back fund managers. GDX’s parallel uplegs during 2020’s
monster 40%+ gold ones averaged excellent 105.4% gains!
During gold’s last 26% upleg earlier this year, GDX powered up 63.9%
higher at best in mid-April.
The
major gold stocks really run during major gold uplegs, rapidly
multiplying capital. But the smaller fundamentally-superior
mid-tiers and
juniors really outperform their larger peers. Their stocks are
easier to bid higher with lower market caps, and they are better at
growing their production from lower bases. Today our newsletter
trading books are full of great smaller gold miners likely to soar
with gold’s new upleg.
Successful trading demands always staying informed on markets, to
understand opportunities as they arise. We can help! For decades
we’ve published popular
weekly
and
monthly
newsletters focused on contrarian speculation and investment. 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.
Our
holistic integrated contrarian approach has proven very successful,
and you can reap the benefits for only $8 an issue (now 33% off!).
We research gold and silver miners to find cheap
fundamentally-superior mid-tiers and juniors with outsized upside
potential. Sign
up
for free e-mail notifications when we publish new content. Even
better,
subscribe today
to our acclaimed newsletters and start growing smarter and richer!
The
bottom line is a new major gold upleg is gathering steam. Pummeled
lower by heavy gold-futures short selling after a Fed-hawkish
surprise, gold V-bounced sharply on huge covering buying. Despite
that fast recovery, speculators still have massive gold-futures
buying left to normalize their excessively-bearish bets. Their
stage-one short covering isn’t finished, and way-larger stage-two
long buying has barely started.
That
should easily propel gold deep into new nominal all-time-high
territory in coming months. Record closes will drive extensive
bullish financial-media coverage for gold, stoking widespread
popular greed. That will increasingly entice back investors, who
love chasing strong upside momentum. So this young gold upleg
should have no problem attaining major status, and has real
potential to grow to monster gains. |