The
battered gold miners’ stocks are clawing back from their recent
unusual breakdown. That was fueled by heavy gold-futures short
selling slamming gold in the wake of the latest FOMC meeting.
Speculators’ resulting excessive shorts had to soon be covered, and
that tragic terrorist invasion in Israel proved the igniting
catalyst. Both gold and GDX are rebounding sharply, poised to soon
regain their interrupted uptrends.
My
essay last week analyzed
gold’s violent
breakdown in depth. In a nutshell, top Fed officials slashed
their forecast for 2024 rate cuts in half from 100 basis
points to 50bp. Despite these dot-plot projections being
notoriously inaccurate, traders viewed that shift as very hawkish.
So afterwards they flooded into the US dollar as Treasury yields
soared, which unleashed withering gold-futures shorting hammering
gold lower.
Gold
was looking solid technically before that late-September FOMC
meeting, still in its strong upleg’s uptrend and still above its
200-day moving average. But over the next nine trading days
following those shifting year-end-2024 dots, gold plunged 5.5%
on a parallel 1.5% US Dollar Index surge! Both of gold’s key
support zones were shattered, and its festering pullback was
stretched into a formal correction exceeding 10%.
With
gold’s powerful 26.3% upleg that nearly carried it to new nominal
record highs slain, the gold stocks weren’t going to take that
well. Gold miners’ profits are highly leveraged to prevailing gold
prices, so gold-stock prices amplify whatever their underlying metal
is doing. During that nine-trading-day post-FOMC span, the leading
GDX gold-stock ETF collapsed 12.3%. That made for 2.2x downside
leverage to gold.
GDX
is dominated by the largest
major gold miners,
and their stocks tend to amplify material gold moves by 2x to 3x.
So this small contrarian sector’s latest plunge was actually on the
light side relative to gold. But that recent drop sure had an
outsized psychological impact, with bearishness soaring as a
months-old selloff deepened. Gold’s pullback had started from
$2,050 in early May, and GDX’s from $35.85 in mid-April.
With
gold stocks seriously of favor today, traders have forgotten their
last upleg. That powered up a nice 63.9% over 6.5 months,
leveraging gold’s underlying one by 2.4x. Before the last several
weeks and that hawkish-2024-dots scare, GDX remained in this upleg’s
uptrend despite selling off with gold since early May. This chart
superimposes GDX and some of its key technicals over gold during the
last several years.
Gold
stocks’ unusual breakdown in recent weeks is striking,
knifing well below uptrend support. That extended GDX’s total
selloff since its latest upleg peak to 27.7% over 5.7 months. While
steep, that was normal leveraging gold’s roughly-parallel
pullback-then-correction by 2.5x. But gold’s sharp drop wasn’t
sustainable, as I explained in
last week’s essay
written right at gold’s lows. My contrarian conclusion then was...
“The
bottom line is gold just suffered a violent technical breakdown,
trashing sentiment. But gold’s latest plunge was driven by massive
gold-futures selling, leaving speculators’ positioning
exceedingly-bearish. These super-leveraged traders have probably
about exhausted their capital firepower available for selling.
Their shorts in particular are likely challenging major secular
highs, which are never sustainable for long.”
“That guarantees huge mean-reversion short-covering buying is
imminent, which will catapult gold sharply higher. As specs rush to
cover or face financial ruin, the much-larger long-side specs will
pile on to chase gold’s upside momentum. The sparking catalyst for
all this will be some Fed-dovish data shifting traders’
federal-funds-rate expectations, which could come any day. Battered
gold stocks will soar as gold recovers.”
That
has all started unfolding in the week since, except the surprise
ignition source for that inevitable gold-futures short covering. It
wasn’t Fed-dovish data, but Islamic jihadis invading Israel out of
the blue! The whole world was shocked over the weekend watching
their horrific massacre. Gold exited trading last Friday at $1,829,
then gapped up to $1,850 late Sunday New York time as the Asian
markets opened.
There’s nothing more bullish for gold than excessive spec
gold-futures shorts, which guarantee imminent strong gold rallies.
Shorting effectively requires traders to borrow contracts to sell,
which legally soon have to be repaid necessitating symmetrical
offsetting buying. Specs run extreme leverage too, so they can’t
afford to be wrong for long or risk total ruin. This week
gold-futures margins are only $7,800 per contract.
Yet
each one controls 100 ounces of gold worth $187,400 at mid-week
prices. That enables maximum leverage up to 24.0x, which is
insane. At 24x, a mere 4.2% gold move against speculators’ bets
would wipe out 100% of their capital risked! So when these guys saw
gold instantly surge 1.2% from Friday’s US close late Sunday, their
pucker factor had to soar. How would Israel avenge its butchered
peaceful citizens?
Iran
has long funded the terrorist Hamas organization, and there were
already questions about what role Iran played in that Israel
invasion. There’s serious risk a wider regional war could erupt,
unlike anything seen in the past half-century. Israel could
retaliate against Iran directly, or Iran and potentially Syria could
escalate against Israel with their Islamic-militant proxies. All
that makes it a heck of a lot riskier to short gold!
Speculators’ collective gold-futures positioning is only reported
weekly in the famous Commitments of Traders reports. While current
to Tuesday closes, they aren’t released until late Friday
afternoons. The latest one when this essay was published had
October 3rd data, a day gold slumped to a new correction low of
$1,824. GDX would hit its own selloff-to-date nadir of $25.91 the
next day as gold continued to slip.
That
day specs’ total gold-futures longs fell to just 273.7k contracts.
That was on the lower end of their tight ten-CoT-week trading range
of 271.7k to 282.4k. As gold entered that span way up near $1,974
before dropping relentlessly within it to $1,820 last Thursday, spec
long selling had to be exhausted. That violent gold
breakdown would’ve shaken loose any more selling if specs had
remaining capital firepower for it.
Gold-futures trading is so extraordinarily risky that only a small
group of traders attempt it. While their market impact is amplified
by their extreme leverage, they only command very-limited capital.
Apparently nearly all of these guys with the will and capacity to
sell longs had already done it. That alone was very bullish for
gold, as spec longs outnumbered their shorts by 2.5x on average over
the past 52 CoT weeks.
That
means spec longs are 2.5x more important than shorts for driving
gold price trends. Big gold uplegs generally aren’t at risk of
failing until speculators buy enough gold-futures long contracts to
drive them way up to recent years’ upper resistance around 413k.
Last Tuesday specs’ bearish long positioning left them with vast
room to buy a massive 139.3k contracts before returning to
those gold-upleg-slaying levels!
For
reference, anything over 20k in any single CoT week is huge and
really moves gold prices. Over ten CoT weeks specs had only sold
21.9k longs total, a tiny 2.2k weekly run rate. All the action
driving gold’s violent breakdown came on the smaller short side. In
that same ten-CoT-week span, total spec shorts soared 64.4k
contracts to 161.7k as of last Tuesday! Such levels are
exceedingly-high and unsustainable.
My
essay last week included an important
spec-gold-futures-positioning chart if you haven’t seen one
recently. Total spec shorts at 161.7k were the highest seen by far
since early November 2022. That was when gold was finishing
bottoming after being crushed last year, by the US Dollar Index’s
parabolic
moonshot to multi-decade secular highs on monster Fed rate
hikes. That unleashed massive gold-futures selling.
At
worst between late September 2022 when gold bottomed at deep
stock-panic-grade lows and early November, total spec shorts hit
185.3k. That was an extreme 3.8-year secular high happening
right as gold bottomed at just $1,623! In that drawn-out
bottoming process, total spec shorts exceeded last week’s 161.7k in
just five CoT weeks. Speculators’ quite-finite
gold-futures-shorting firepower was expended.
They
legally soon had to buy offsetting contracts to cover and close
their shorts, and they did as gold bounced and started rebounding.
The resulting symmetrical fierce short-covering buying helped
catapult gold 20.2% higher over the next 4.2 months! The major
gold stocks per GDX blasted up 52.1% in that span, amplifying gold’s
mean-reversion rebound by 2.6x. A similar scenario has just started
unfolding now.
Very
tellingly, gold started recovering Friday despite a shocking upside
surprise in the critical US monthly jobs report. The +336k headline
jobs growth in September doubled Wall Street’s +170k consensus
estimate! That was incredibly Fed-hawkish, greatly bolstering
top Fed officials’ incessant higher-rates-for-longer jawboning.
Such a crazy beat should’ve unleashed withering gold-futures
selling, pummeling gold lower.
Yet
gold bounced 0.5% that day, while the USDX fell 0.2%! That was
strong evidence the gold-futures selling and US-dollar buying had
exhausted themselves. All this came the day before Muslim militants
started slaughtering Jewish kids and families. While Hamas’ Israel
invasion was the main gold-futures-short-covering catalyst, one was
inevitable soon given specs’ excessively-bearish gold-futures
positioning.
In
the first few trading days of this week into this essay’s Wednesday
data cutoff, gold surged a big 2.4% to $1,874. That quicky
erased nearly half of gold’s violent breakdown since late
September’s FOMC-2024-dots hawkish surprise! GDX blasted 5.3%
higher in those several trading days hitting $28.32. That amplified
gold’s sharp reversal by 2.2x, and restored almost 7/10ths of major
gold stocks’ unusual breakdown.
The
newest CoT report current to this Tuesday won’t be released until
late Friday afternoon, so traders don’t know how many shorts specs
have covered. But odds are this gold-futures short-covering buying
is only starting. From late March to early August, total spec
shorts averaged a tight 94.1k contracts which was right at their
lower support line of recent years. Mean reverting back there would
require 67.6k of buying!
Such
a massive slug of short covering should take at least a few weeks.
And that’s exactly what births major gold uplegs. They all start
with stage-one gold-futures short-covering buying, which is
inherently self-feeding. The more specs buy to cover, the faster
gold surges forcing still more specs to close out their shorts.
That soon propels gold high enough for long enough to start enticing
back long-side specs.
Unlike legally-required short covering, long buying is totally
voluntary. But the much-larger long guys love piling on to chase
gold upside, amplifying it with their leveraged capital
inflows. That stage-two long buying greatly grows gold uplegs.
Short covering is the trigger reversing gold then firing up the
way-bigger long-buying engine. Eventually that drives gold high
enough to attract back investors’ vast capital in stage three.
With
the very-low spec longs and very-high spec shorts last week, gold
could easily blast another 20%+ off its latest correction low in
a strong new upleg. That’s nothing special by gold-upleg standards
either. Again the last one peaked up 26.3% in early May, and there
were a pair of +42.7% and +40.0% monsters both cresting in 2020!
But even at mere 20% gains in coming months, gold will cross a
magical threshold.
There’s nothing that excites speculators and investors more than new
all-time highs, which the financial media extensively covers stoking
extreme greed and bullishness. Gold’s nominal all-time-record close
was $2,062 in early August 2020. Another middling 20% gold upleg
off last week’s low would leave the yellow metal way up at $2,183,
deep into new record territory! That will work wonders to
attract in big capital.
Traders love chasing winners, and would flood back into gold and
gold stocks with a vengeance as new records are achieved.
Investors’ gold portfolio allocations today are virtually zero,
so even shifting a percent or two into gold would launch it
stratospheric. A great proxy for that divides the value of the gold
bullion held by the world-dominating GLD and IAU gold ETFs by the
market capitalization of the elite S&P 500 stocks.
Exiting September, American stock investors’ gold held via GLD and
IAU shares was worth $77.1b. Yet the SPX stocks were worth a
staggering $38,218.4b. That implies American gold portfolio
allocations of just 0.2%, effectively nothing! When gold
returns to favor as new records fall, investors including fund
managers will really up their meager gold allocations. Even a
slight change is super-bullish for gold prices.
And
as goes gold, so go the gold miners’ stocks. Again GDX tends to
amplify material gold moves by 2x to 3x, so a 20% gold upleg implies
40% to 60% GDX gains. That’s considerable, well worth riding. But
gold stocks have exceptional upside potential way beyond normal as
gold nears record-breaking territory. The bullish financial-media
coverage will attract in far more traders than usual, greatly
boosting gold-stock gains.
If
this past week’s gold-futures short-covering buying continues as it
ought to, gold could start hitting new nominal record closes
within a few months. The battered gold stocks will be way
higher from here when that happens. And the major gold miners’
gains will be trounced by the fundamentally-superior smaller
mid-tier and
junior minors we’ve long specialized in. Our trading books are
full of them still at cheap prices!
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The
bottom line is gold stocks are clawing back from their recent
unusual breakdown. That was driven by gold’s own violent breakdown
on massive gold-futures short selling following a hawkish FOMC
surprise. But that left speculators’ gold-futures positioning
extreme, with excessive and unsustainable shorts. That guaranteed
imminent symmetrical short-covering buying on the right catalyst,
reversing gold sharply higher.
Surprisingly that didn’t prove Fed-dovish economic data, but the
shocking massacre in Israel. Resulting exploding geopolitical risks
make it way more dangerous to short leveraged gold futures. So odds
are the mean-reversion normalization buying to unwind those bets
will continue. That will keep driving gold back higher, and the
gold stocks will amplify its gains like usual. It sure looks like
major uplegs are being born! |