Gold’s latest pullback has left traders really down on it, fueling
mounting bearishness and apathy. But that healthy selloff
accomplished its mission of rebalancing sentiment, eradicating early
May’s greed and overboughtness. That has reset gold’s technicals,
leaving them very bullish. Hammered back down near major support
zones, the yellow metal is nicely set up to start rallying soon and
resume its interrupted upleg.
Today’s pessimistic gold psychology has been fueled by recent price
action. Gold’s surged into early May, extending its latest upleg’s
gains to a strong 26.3% over 7.2 months. But ever since then, gold
has ground lower to sideways on balance. At worst last week, gold’s
total pullback since its latest interim high grew to 6.9% over 1.8
months. Gold drooped from $2,050 to $1,908 in that span, really
damaging sentiment.
That
pullback was necessary, as gold was getting seriously overbought
while greed ran rampant in early May. Gold blasted higher so fast
that it soared 13.2% above its baseline 200-day moving
average! That wasn’t quite to the extreme 16%+ upleg-slaying danger
zone, but starting to threaten it. Nearly everyone was quite
bullish on the yellow metal, expecting its strong gains to
continue. That was really unbalanced.
Major uplegs can be prematurely burned out by excessive herd greed
and overboughtness. They attract in too much buying too soon,
exhausting the near-term capital firepower available to keep feeding
uplegs. That forces them to peak, fail, and roll over into larger
corrections. With a few more days of surging back in early May,
gold could’ve hit that tipping point. But selling returned earlier,
preserving this upleg’s longevity.
A
confluence of several factors drove gold’s latest pullback. The
primary one was speculators selling gold futures on higher
odds for more Fed rate hikes. Those flared with
better-than-expected economic data and hawkish Fedspeak from top
officials. That also often
goosed the US
dollar, which is the main trading cue for gold-futures
speculators. The stronger dollar unleashed more selling,
exacerbating gold’s pullback.
The
resulting retreating gold prices increasingly discouraged investors,
who have pulled more capital out of gold as its selloff festered
on. Gold’s price momentum drives their herd psychology, and most of
that has been to the downside in the last couple months. That forms
vicious circles of self-feeding capital outflows. The more
investors sell, the faster gold falls, the more bearish they get, so
the more selling they do!
Gold’s mounting pessimism has intensified with stock markets surging
in this artificial-intelligence bubble. When general stocks are
excitingly blasting higher, investors forget the wisdom of prudently
diversifying their stock-heavy portfolios with counter-moving gold.
Further aggravating psychology, June is gold’s weakest time of
the year seasonally in the heart of its summer doldrums. That
all made for a bearish conflux.
Yet
despite those stiff headwinds buffeting gold, it has held its own
this summer. This chart is updated from my latest
gold-summer-doldrums research thread I analyzed a month ago.
Gold’s June, July, and August performances in modern bull years are
individually indexed to May’s final close and then charted
together. Gold generally drifts sideways to lower in June, as the
red line’s averaged indexed seasonals show.
While gold has been tracking below its seasonal average in recent
weeks as this pullback grew, it isn’t by much. The yellow metal
generally meanders within 5% either way of where it entered market
summers. At worst last month, gold was still well within that
summer-doldrums trading range only down 2.8%. And this
normal seasonal weakness caused by no recurring outsized gold demand
spikes is already passing.
The
summer doldrums could be more accurately called the June doldrums,
as that is their peak month. On average in June during these modern
gold-bull years, gold slumped 0.2%. Last month proved a lot worse
with a gold pullback already underway entering this market summer,
with a 2.3% gold loss. But gold tends to rebound strongly from
there, averaging 1.1% gains in July then accelerating to 1.8% in
August!
So
the usual summer-doldrums apathy should soon stop contributing to
gold’s bearish psychology. That is also true of these surging stock
markets stunting prudent portfolio diversification. Between
mid-March to this week, the flagship S&P 500 stock index has
soared 15.6% at best! That has left many major US stocks
greatly overbought. The SPX itself stretched way up to 1.113x its
200dma on Monday as Q3 dawned!
That
overboughtness is as unsustainable for stock markets as it was for
gold in early May, fueling excess herd greed. Amplifying the need
for a sharp selloff which could quickly snowball, stock-market
valuations remain in dangerous bubble territory. Entering July, the
500 elite SPX stocks averaged literal-stock-bubble
trailing-twelve-month price-to-earnings ratios way up at 29.7x! The
classic bubble threshold starts at 28x.
The
market-darling AI-bubble stocks are far worse, led by NVIDIA which
exited June at an absurd 214.1x P/E! So a big stock-market selloff
is overdue, which will likely be a serious pullback at best
approaching 10%. But that could easily cascade into a full-blown
correction running up to 20%, or even beyond that back into bear
territory. These lofty euphoric stock markets decisively
rolling over will rekindle gold investment.
Incredibly despite this latest gold upleg growing to those strong
26.3% gains in early May, there has been very little identifiable
gold investment. Unfortunately comprehensive global gold
investment data is only published quarterly. But the combined
holdings of the world-dominating American GLD and IAU gold ETFs have
proven a good daily high-resolution proxy for that. They have
barely budged during this upleg.
From
late September to early May as gold’s upleg ran, GLD+IAU holdings
actually fell 3.3% or 47.5 metric tons as the AI bubble gathered
momentum! As of mid-week with gold still up 18.1% despite this
recent pullback, GLD+IAU holdings are down 4.6% or 65.4t since
gold’s stock-panic-grade low that birthed this upleg. At best
within this upleg from mid-March to late May, these holdings only
climbed 4.3% or 58.2t.
So
gold has powered dramatically higher despite virtually no
stage-three investment buying, which is what fuels major uplegs.
Again up 26.3% at best, this latest one is the biggest by far since
a pair of monsters cresting in 2020 where gold soared 42.7% and
40.0% higher.
Strong investment buying drove those, with GLD+IAU holdings
rocketing up 30.4% or 314.2t during the first and an even-larger
35.3% or 460.5t in the second!
The
biggest gold uplegs depend on robust investment demand. Thus
when investment capital inflows start returning to gold, this latest
upleg will resume and grow considerably larger. But since investors
love chasing upside momentum, they probably won’t get the ball
rolling. That will depend on the gold-futures speculators like
usual. The extreme leverage they run grants them outsized influence
over gold price trends.
Gold’s recent pullback again extended to 6.9% at worst as of last
week. That isn’t unusual at all for a mid-upleg selloff to bleed
off excessive overboughtness and rebalance sentiment. Back in
February this same gold upleg suffered a similar-but-sharper
7.2% plunge in just 0.8 months. That left really-bearish sentiment
in its wake much like today, paving the way for gold to rebound
sharply resuming its upleg.
Over
the next 2.3 months, gold blasted up 13.2% to early May’s new upleg
high of $2,050! Speculators’ leveraged gold-futures trading was
responsible for all that, not identifiable investment demand. The
same is true for gold’s latest pullback. During its 6.9% retreat,
GLD+IAU holdings merely edged 0.7% or 9.2t lower as investors
weren’t fleeing. But in that same span, speculators dumped a large
41.0k long contracts.
That’s the equivalent of 127.5 metric tons of gold, well over an
order of magnitude bigger than investment selling! The more
gold-futures selling speculators do, the less they have left to do.
Their capital firepower for selling is quite finite.
Eventually their longs get low enough and shorts high enough where
they don’t have much more to sell. All they can do at that point is
resume buying, normalizing their overall positioning.
As
of the latest Commitments of Traders report detailing this,
speculators’ total longs had fallen down to just 268.9k contracts.
Those were their lowest levels since early March, when gold’s upleg
resumed and soon surged that 13.2% in just 2.3 months. After these
traders have excessively sold gold futures, they soon resume buying
catapulting gold higher. This perpetual dynamic will soon
rekindle gold’s upleg again.
Total spec longs can be considered in a trading range, with this
gold upleg’s starting at 247.5k back in late September when it was
born. Spec longs have peaked far higher
around 413k
contracts in recent years, which is near where their buying
firepower exhausts. That usually drives gold toppings ending
uplegs. Spec longs’ high-water mark in today’s gold upleg was
merely 318.5k in early May, still very low!
That
413k upper resistance less this upleg’s starting 247.5k yields a
trading range of 165.5k gold-futures long contracts. As of last
Tuesday’s latest CoT report, total spec longs are merely about 1/8th
up into this key range. That implies a whopping 7/8ths of
speculators’ likely gold-futures long buying remains to drive this
gold upleg much higher! Even
back in
mid-October, I was forecasting it growing into another monster
40%+.
Today after this gold upleg’s second pullback, speculators have room
to buy an enormous 144.1k gold-futures long contracts. That’s the
equivalent of a massive 448.1t of gold! Even if specs only did half
of this stage-two buying, it would almost certainly drive gold high
enough for long enough to start enticing investors to return. I
still expect today’s gold upleg to exceed 40% before giving up its
ghost, besting $2,275.
That
would generate a heck of a lot of excitement and greed, which
investors would chase. Not
adjusted for
inflation, gold’s nominal all-time-record close is only $2,062
seen in early August 2020. So when spec gold-futures long buying to
normalize their positioning inevitably drives gold decisively above
that, it will be big and widely-covered financial news. New
record highs really stoke investment demand for anything!
Since speculators have fled gold futures in recent months on
Fed-hawkish economic data and officials’ jawboning, they’ll flock
back when that turns dovish. And that’s increasingly probable soon
here. As of early May, the Fed has hiked rates an
exceedingly-extreme 500 basis points off zero in just 13.6
months! Now top Fed officials collectively expect another 50bp
in their latest projections, or two more 25bp hikes.
So
if this violent rate-hike cycle stretches to 550bp total, it is
already 91% finished! If it somehow grows even bigger to 600bp, it
is 83% complete. No matter what the Fed does from here, the
lion’s share of its rate hikes are behind it. The Fed can’t
keep hiking indefinitely without hammering the US economy into a
severe recession or depression, and literally bankrupting the
heavily-indebted US federal government.
So
maybe after their next expected late-July hike, or a second one in
late September, Fed officials will have to start dialing back their
hawkish rhetoric. Traders won’t believe they will keep hiking much
beyond that. Then they will increasingly look for rate cuts, which
often start soon after rate-hike cycles end. That will lead them to
interpret Fedspeak and major economic data more dovishly, unleashing
gold-futures buying.
Gold’s technicals should be considered against this
impressively-bullish backdrop. This upleg’s latest pullback has
fully eradicated the serious overboughtness and greed plaguing
gold in early May. The yellow metal has been pounded back down near
multiple major support zones. And it remains well within this
upleg’s uptrend channel despite the surging bearishness lately.
Gold is nicely set up to rebound sharply.
Gold’s bullish technicals are readily evident in this chart. Early
May’s serious overboughtness with gold stretched way above its
200dma is gone. That collapsed from 1.132x at this upleg’s latest
interim high then to just 1.030x last week! These key moving
averages are major support zones within bull markets, and gold is
within just a few percent of its 200dma. And it is still well above
its uptrend’s lower support line.
Despite this latest pullback that so tanked herd sentiment, gold is
still carving higher lows and higher highs on balance. The
uptrend formed by its latest strong upleg since late September is
still intact! Its lower support line is now running around $1,890,
well below gold’s pullback-to-date closing low as of mid-week of
$1,908. The crazy leverage in gold futures forces their traders to
closely watch technicals like these.
They
have to like what they see. Gold’s concerning overboughtness and
greed in early May have now been totally erased. Gold remains well
above important 200dma support, and well within its upleg’s uptrend
channel. So any gold-futures buying sparked by
increasingly-Fed-dovish news flow as the end of this rate-hike cycle
nears will drive gold sharply higher. Investors will start
taking note and chasing those gains.
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 technicals are very bullish after this upleg’s
latest pullback. That has pounded gold back down near major
support, eradicating early May’s serious overboughtness. Yet this
strong gold upleg’s uptrend channel is intact, with the yellow metal
still well above its lower support and 200-day moving average. That
healthy mid-upleg pullback also accomplished its mission of bleeding
off excessive greed.
Mostly fueled by speculators dumping gold-futures long contracts,
gold’s latest selloff is running out of steam. With Fed hawkishness
soon giving way to dovishness as this rate-hike cycle peters out,
spec long buying will soon return. That will push gold high enough
for long enough to start enticing back investors to chase its upside
momentum. Gold’s summer doldrums passing and lofty stock markets
rolling over will help. |