Gold’s strong upleg accelerated this week, powering to major new
breakout highs. Speculators rushed to buy gold futures following
surprising weak-dollar comments from the US Treasury Secretary,
which hit the US dollar hard. That boosted gold to critical
technical levels that should really intensify the shift back to
bullish psychology. This mounting gold breakout confirms gold’s
bull market is very much alive and well.
While this week’s surge put gold on many more traders’ radars, it
has actually been picking up steam for 6 weeks now. Gold’s latest
major interim low of $1242 came a couple days before the Fed’s
latest rate hike in mid-December. The gold-futures speculators who
dominate this metal’s short-term price action have always had a deep
and irrational fear of Fed rate hikes. Historically gold has
thrived in
rate-hike cycles!
Leading into that fifth rate hike of this current cycle, these
hyper-leveraged traders aggressively dumped longs and ramped shorts
at record levels. That battered gold lower while exhausting
potential selling. So once the Fed hiked as expected, and didn’t up
its 2018 rate-hike forecast from the prior quarter’s three more,
these excessively-bearish traders started buying back in. This
pattern was seen around past rate hikes.
So
two trading days after this latest rate hike when gold was still at
$1256, I published an essay outlining why that hike
was so bullish
for gold. It concluded, “…Fed
rate hikes are bullish for gold, and this week’s is no exception…
After each past December rate hike which gold-futures speculators
sold aggressively into, gold dramatically surged in the subsequent
months.” And that’s indeed exactly what happened since.
By
the final trading day of 2017 gold had already surged 4.9% out of
its pre-rate-hike interim low. Those strong gains continued in this
young new year despite these
extreme mania
stock markets retarding gold investment demand. By this
Tuesday, gold’s new upleg extended to an 8.0% gain over nearly 6
weeks. Since the Fed’s rate hike, gold had rallied on 19 out of 27
trading days. Upleg momentum was already building.
Every January the ultra-exclusive World Economic Forum is held in
Davos, Switzerland. It attracts the world’s most powerful people,
from CEOs to top political leaders to billionaires. The financial
media flocks to the Swiss Alps to interview these leading movers and
shakers. One of this year’s attendees is Steven Mnuchin, Trump’s
Treasury Secretary. He gave an interview in Davos which shocked
currency traders.
Mnuchin told reporters, “Obviously a weaker dollar is good for us as
it relates to trade and opportunities.” That’s certainly true, as
it’s easier for American companies to export around the world when
their goods are less expensive due to a lower dollar. But Treasury
secretaries have a long tradition of never saying anything about the
dollar beyond that they “support a strong-dollar policy”. So
Mnuchin’s candor was unexpected.
Mnuchin had made similar comments last year that didn’t affect
markets as much. But the combination of this past year’s strong
dollar downtrend and a couple more developments that day triggered
big US dollar selling. The US had just slapped tariffs on imported
solar panels and washing machines hours earlier. Trump’s Commerce
Secretary Wilbur Ross spoke alongside Mnuchin at that Davos
conference.
Ross
warned more trade measures were coming. When asked about trade wars
he replied, “Trade wars are fought every single day... So a trade
war has been in place for quite a little while, the difference is
the US troops are now coming to the rampart.” There’s no more
efficient way to boost exports and execute trade wars than jawboning
the local currency lower. All this together really struck home for
currency traders.
So
the US Dollar Index plunged 1.0% on Wednesday following those
comments, hitting its worst levels in 3.1 years. Incidentally this
past year’s dollar weakness shouldn’t have surprised anyone. Back
in late December 2016 when dollar euphoria reigned as the USDX
traded at a 14.0-year secular high, I wrote an essay on the
unsustainability
of those extremes. I warned of “a major topping underway”
before a new bear.
With
the USDX failing below 90 on those Mnuchin and Ross comments,
speculators started flooding into gold futures. After closing near
$1341 in US trading Tuesday, gold surged as high as $1352 in
overnight action. Those gains extended in the US on Wednesday, with
gold blasting up 1.3% to $1358. That was a very important level
technically and psychologically, confirming gold’s forgotten bull
market is alive and well.
This
chart looks at this young gold bull superimposed over speculators’
collective positions in both long and short gold-futures contracts.
The Fed’s five rate hikes of this tightening cycle are also
highlighted, showing how bullish they’ve proven for gold. This
week’s $1358 gold levels are a major upleg breakout, and
right on the verge of being a major bull-market breakout. Investors
will certainly take notice of this.
Gold’s bull was born in despair in December 2015 the day after the
Fed’s first rate hike in 9.5 years. The gold-futures speculators
had freaked out leading into that FOMC meeting, fleeing longs while
rushing to add shorts. That hammered gold to a 6.1-year secular
low. Just a few trading days before that hike when gold was
despised, I published deep research showing how gold thrived
during past
Fed-rate-hike cycles.
Futures speculators were betting the other way, expecting gold to
collapse once the Fed ended ZIRP. It didn’t take them long to
realize the error in their ways though, as they quickly started
buying to cover their excessive shorts while flooding into new longs
with a vengeance. So gold soared 29.9% higher over the next 6.7
months, well exceeding the +20% new-bull threshold! That initial
bull upleg peaked at $1365 in July 2016.
After such a blistering run, gold needed to take a breather and
consolidated high for over a quarter. But that rolled over into a
severe correction on two separate events. First
gold-futures stops
were run which blasted this metal back down to its 200-day
moving average. After that gold bounced sharply, but that was
truncated by Trump’s surprise election win in early November 2016.
That unleashed epic Trumphoria.
Stock markets surged on hopes for big tax cuts soon from the
newly-Republican-controlled government. That led futures
speculators and investors alike to flee gold, crushing it sharply
lower. By mid-December 2016 the day after the Fed’s second rate
hike of this cycle, gold had plunged 17.3% to $1128. That was not a
new bear though, as it fell shy of the necessary 20% loss. But
psychologically it may as well have been!
That
exceedingly-anomalous gold plunge in late 2016 mostly driven by the
post-election stock-market surge wreaked tremendous sentiment
damage. The investors who started getting excited about gold in the
first half of 2016 abandoned it, assuming that sharp rally was a
flash in the pan. And with the stock markets powering relentlessly
higher all throughout 2017 on taxphoria, gold receded into the
market shadows.
A
couple weeks ago I wrote an essay delving into the selloff dynamics
between stock
markets and gold. Gold is a unique asset that tends to rally
when stock markets sell off materially, making it the ultimate
portfolio diversifier. Thus investors tend to view it as the
anti-stock trade. It was actually the last stock-market
correction in early 2016 that fueled gold’s powerful upleg early
that year. Stocks greatly affect gold.
While gold can still rally when stock markets happen to be climbing,
investors simply feel no need to diversify their stock-heavy
portfolios. So they largely forget gold. Thus gold sentiment for
much of 2017 remained nearly as bearish as at those deep late-2016
lows. Investors remembered gold spiraling lower after the election,
and that continued to shape their opinions and outlooks on gold
regardless of price action.
Gold
actually fared really well in 2017 considering the extreme
stock-market rally. Last year gold still powered 13.2% higher, very
impressive considering the concurrent huge 19.4% S&P 500 surge!
This gold bull’s second upleg enjoyed a 19.5% gain over 8.7 months
leading into early September. Gold was able to peak at $1348 before
that upleg failed after stock markets surged again following a new
wave of taxphoria.
Even
though gold never entered a bear market, that interim-high level was
problematic for sentiment. While close, September 2017’s $1348
remained decisively below July 2016’s $1365. For key technical
levels I consider decisive to be 1% beyond the previous
extreme. So even though a 19.5% gold upleg is nothing to sneeze at,
especially in extremely-euphoric stock markets, it wasn’t enough to
change psychology.
Without a new bull-market high, gold stayed out of the
financial-news headlines. The investors that had fled this leading
alternative investment in the wake of Trump’s election win saw
nothing to get gold back on their radars. The legions of gold bears
could argue that the secondary lower top confirmed gold was in a
downtrend. Technical analysis is something of a Rorschach test,
often reflecting analysts’ own biases.
That
gold bearishness really intensified heading into this latest Fed
rate hike in December 2017. As that month dawned, it had been 16.8
months since gold’s initial bull-market high. Gold’s chance to
break out a few months earlier had failed. So as you can see above,
gold-futures speculators fled in terror from long positions while
also ramping shorts. This latest gold-futures liquidation hit
all-time record highs.
Gold-futures speculators’ collective positions are reported once a
week in the CFTC’s Commitments of Traders reports. They are current
to each Tuesday. In the CoT week ending December 12th on the eve of
the Fed’s fifth rate hike of this cycle, speculators dumped an
astounding 49.9k long contracts while adding 20.5k new short ones!
That was the largest selling on record out of 989 CoT weeks
since early 1999!
These traders’ collective bets had run to such hyper-bearish
extremes that they had to mean revert after whatever the FOMC did in
mid-December. And that has indeed happened. But as long as gold
prices just meander within that giant trading range established in
the first half of 2016, it will be difficult to shift psychology
back to bullish. This week’s strong gold surge on that dollar
weakness is starting to change that.
Gold’s $1358 close in US trading Wednesday was 0.7% above its
early-September peak. While not quite at that 1%+ threshold for a
decisive breakout yet, this is still a major higher high. Gold has
been carving higher lows periodically ever since late 2016 when that
post-election selloff exhausted itself. But higher lows don’t spark
excitement outside of existing gold investors, higher highs
are necessary for that.
Gold
needs to close over $1361 to see a decisive breakout above the last
upleg’s peak. It has traded above that level intraday in
both Asian and American trading since Wednesday’s close. It’s only
a matter of time until $1361+ sticks on a closing basis. That’s
going to finally confirm higher highs to go along with the past 13.3
months’ higher lows. But the real prize remains a decisive breakout
to new bull highs.
The
new gold bull again peaked at $1365 in early July 2016 within a
couple weeks of the UK’s Brexit vote. That unexpected outcome of
the British people voting to take back their sovereignty from the
unaccountable European Union bureaucrats was such a shock to the
markets that major central banks rushed to declare they were ready
to print money if necessary. Stocks rallied sharply on hopes for
more easing.
The
S&P 500 had been drifting sideways to lower without a single new
bull-market high for 13.7 months before that. Gold $1365 in
July 2016 happened the very trading day before the S&P 500 finally
climbed to its first new record high. With stock markets apparently
off to the races again, gold demand waned as investors weren’t
interested in diversifying. A single close above $1365 will finally
confirm gold’s bull persists!
But
if gold just touches those bull-to-date highs and fades, bearish
technical analysts can easily dismiss it as a double or triple top.
In order for gold to garner financial-media attention and attract
investors’ gazes back to it, a decisively 1%+ breakout is
necessary. That happens at $1379. Gold is so close to a major
upside breakout to new bull highs, which will conclusively prove to
all investors its current bull market still lives.
That
will really start shifting psychology away from the
overwhelmingly-bearish levels it’s been stuck at since late 2016.
In a normal year gold’s strong 2017 rally would’ve gone a long way
to restore bullish sentiment. But again gold was overshadowed last
year by the extreme stock-market surge, which stole all the
limelight. The blind spot investors harbor for gold will start
fading when new bull-market highs are seen.
The
exact timing is unknowable and not really important. Gold could
power over $1379 within days, or it might take weeks. Investment
gold buying will flare again really boosting gold once these
extremely-euphoric mania-blowoff stock markets finally roll over.
Stock selloffs
are great for gold, and even a minor one will easily catapult it
to decisive new bull highs. That will dispel the fog of bearishness
plaguing gold.
$1400+ gold may seem high after a multi-year bear market followed by
a couple years of drifting low in this
stock-market-surge-interrupted bull market, but it’s really not.
Gold first climbed above $1400 in November 2010 and largely stayed
there until June 2013. Over that 2.6-year span gold averaged
$1595! And it went as high as $1894 in August 2011. Gold is
nowhere near historical extremes, still relatively low.
At
best gold’s young bull was only up 29.9% over 6.7 months by
mid-2016. That’s trivial as far as gold bulls go, a rounding
error. During gold’s last secular bull between April 2001 to August
2011, gold soared 638.2% higher in 10.4 years! Today’s young gold
bull would still be tiny even if it saw gold doubled, taking it to
$2102. That would still be well below gold’s
inflation-adjusted real high from January 1980.
As
I’ve been arguing continuously since late 2016, this young gold bull
ain’t over yet! Major central banks around the world have
conjured many trillions of dollars out of thin air which have
levitated world stock markets. That really depressed gold demand.
But once these QE-bloated markets inevitably roll over on this
year’s new Fed
and ECB tightening, a record flood of flight capital will likely
seek the ultimate hedge of gold.
Investors can play gold’s ongoing mean-reversion bull in physical
gold bullion or the leading GLD SPDR Gold Shares gold ETF. But the
coming gold gains will be really amplified by the gold miners’
stocks. As gold rises, gold miners’ profits grow much faster. Thus
major gold-stock prices usually leverage gold’s upside by 2x to 3x.
Smaller gold miners can double that again. Gold stocks yield
life-changing gains in gold bulls.
In
essentially the same span of that last gold bull ending in late
2011, the HUI gold-stock index rocketed 1664.4% higher! Last week I
wrote an essay explaining why the parallel flagship GDX VanEck
Vectors Gold Miners ETF was on the verge of
a major $25
upside breakout on strong earnings potential. There’s no doubt
investors will flood into gold stocks as gold psychology changes,
ultimately driving incredible gains.
While every investor needs to have a 5%-to-10%+ portfolio allocation
to gold for diversification purposes, great gold stocks should be
added on top of that. The beaten-down and left-for-dead gold
miners’ stocks are
deeply
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only sector in all the stock markets likely to power much higher
when everything else heads lower. Great gold stocks are essential
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The
bottom line is this gold bull’s third upleg is breaking out. This
week gold closed above the peak from its second upleg, and is close
to a decisive breakout. That puts gold within spitting distance of
its bull-to-date high of $1365 from July 2016. Once gold powers
decisively above those levels, it will confirm to all that gold’s
bull is very much alive and well. That will work wonders to shift
psychology back to bullish again.
Impressively gold is doing all this with stock markets still at
mania-blowoff record highs. Gold investment demand explodes once
stock markets roll over, which is what ignited and fueled this gold
bull’s strong initial upleg in early 2016. So when the long-overdue
and inevitable material stock-market selling finally arrives, gold’s
advance will really accelerate. Get long before this major
bull-market breakout changes everything! | 
