After gold?s
breathtaking $38 surge in 15 minutes Wednesday, there is much
renewed interest in the Ancient Metal of Kings. The Federal
Reserve, which is clearly being run by lunatics, publicly announced
it is going to create over a trillion dollars out of thin air to
monetize US debt. This degree of pure monetary inflation is utterly
unprecedented.
Gold soared
because it remains the best asset to own in inflationary times.
Inflation is an immoral stealth tax levied on everyone. But it hits
those of modest means the hardest, because rising everyday living
expenses consume a higher proportion of their incomes. When the Fed
injects fiat money into the economy, relatively more dollars chasing
relatively fewer goods and services bid up prices on everything.
But gold always
stays ahead of the rising inflationary tide. New mining only adds
1% to 2% to the global above-ground gold supply annually. Yet even
before this week?s monetization announcement, the Fed grew
the US monetary base by an astounding and frightening 88.1% over the
past year. With vastly more dollars bidding on relatively far less
gold, a rising gold price is the inevitable result of this
inflation.
The prospect of
unbridled monetary inflation rightly terrifies investors. Mountains
of cash, the highest relative and absolute levels ever, languish in
money-market funds earnings zero interest today due to the Fed?s
interest-rate manipulations. As monetary inflation accelerates,
this capital will suffer increasing real losses of purchasing
power. So the natural defense against this central-bank predation
is to move capital into gold.
Thanks to gold?s
inflation-driven surge this week, a lot of traders are starting to
discuss a new gold upleg. They are right, a gold upleg is coming,
but they are late to the party. Today?s gold upleg started way back
in the dark days of November when gold neared $700. Believe it or
not, I had already planned to write this essay, and had these charts
mostly built, before the stunning Fed announcement on Wednesday.
But Ben Bernanke
desperately trying to become the most notorious inflationist the
world has ever seen only adds bullish fuel to the gold fire. While
this week?s monetization pledge surprised mainstreamers and the
deluded
deflationists, the gold strength is no surprise to students of
the markets. Gold?s new upleg was very technically impressive and
well-established for months before the Fed?s inflation unveiling.
As you can see in
this chart, Wednesday?s amazing gold action is barely a blip
relative to gold?s relentless upleg progress since its panic lows.
This metal?s exceptional strength during the tough market months
we?ve witnessed lately has made it one of the best-performing assets
anywhere. Walking through this upleg?s technicals leads to a better
understanding of where gold is likely to go from here.
Before we get to
the birth of this magnificent young upleg, some background is in
order to provide context. Gold sold off sharply in August,
September, and October. This confused countless traders, since gold
is supposed to soar when the financial markets are plunging into a
panic. I found it very disappointing too. Yet extreme stock-market
fear and selling was not the direct catalyst for gold?s weakness,
but indirect.
As mortgage-backed
bonds sold off first, and then general stocks a couple months later,
capital flooded into US Treasuries as a refuge. And foreign
investors had to first buy US dollars before buying Treasuries,
which drove an unprecedented monster rally in the US Dollar Index.
Futures traders, seeing this incredible dollar strength, dumped gold
futures aggressively. This
indirect panic
dynamic was readily apparent even in late October near gold?s
lows.
Interestingly
though, even then the markets were signaling that this artificial
selling pressure on gold was unsustainable. Big investment buying
was countering futures selling. The best example of this was gold?s
epic 11.1% rally on September 17th, its biggest daily gain since
January 1980. Gold did not want to be held down by the artificial
panic-driven dollar rally and fought the futures selling every step
of the way.
By late October,
gold had started to stabilize as its futures sellers were
exhausted. While it plunged to $720 in late October, it didn?t edge
down to its $711 panic low until November 12th. That dark day, when
even long-time gold analysts and fans were universally calling for
gold in the $600s, today?s powerful gold upleg was stealthily born.
As always at major turning points, only hardcore contrarians were
buying gold then.
Gold surged fast
out of those lows, making its biggest initial gains simultaneously
with the US stock markets surging out of their own November panic
lows. On November 21st and 24th (a Friday and Monday), the S&P 500
rocketed 13.2% higher. Over these very days, gold soared 10.2% and
first established this upleg?s resistance line. This episode was
very revealing as it again showed that extreme stock-market strength
was not bearish for gold as a lot of traders
wrongly believe
even today.
After this fast
initial surge in late November, gold corrected sharply. It fell
8.0% in 7 trading days before bouncing, which initially defined its
strong support line rendered above. This also offered an important
lesson that many traders forgot by late February, that gold
pullbacks are often sharp even within powerful uplegs. Each
time gold fell to support, the majority of traders wrongly waxed
morose and bearish on it.
Gold rapidly
recovered though and shot higher in December, back up to its
resistance for a second time. By the end of that month, gold was
already up 23.9% from its panic lows. It was carving a series of
higher highs and higher lows, a beautiful textbook-perfect uptrend.
Meanwhile over this same span, the S&P 500 was only up 6.0%. Even
though gold was doing fantastically well, the great majority of
traders still refused to acknowledge its young upleg at that point.
Another bullish
sign happened in late December when gold powered over its key
200-day moving average for the first time in months. Nevertheless,
this metal had climbed to resistance so a pullback within its
uptrend back down to support was not unexpected. And indeed gold
fell sharply in early January, losing another 8.0% in 9 trading
days. Again traders became irrationally bearish, worrying gold was
going to slide back into the $700s.
But not only was
this metal at its upleg?s established support line at these lows, it
was just above its 50-day moving average as well. In bull-market
uplegs, the 50dma is often the highest-probability point for a
pullback to run out of steam. Many technically-oriented traders,
after seeing 50dma bounces countless times in virtually every
market, tend to buy aggressively on a 50dma approach by an asset
trending higher.
Gold was no
exception, after its short and intense pullback it promptly reversed
course and surged higher within its upleg?s trend channel again in
mid-January. It hit resistance in late January, and then another
key bullish signal flashed in early February. Gold?s 200dma, which
had been declining for months, subtly turned positive again. While
early, a rising 200dma is still a major technical sign of a bull
market.
Gold started
pulling back again in early February, but this fledgling pullback
was halted high in its uptrend. Incredible buying pressure, which I
will discuss below after the next chart, rapidly drove this metal
above resistance for the first time in this upleg. Before this
particular gold rally exhausted itself, gold shot well above
resistance and challenged $1000 nominal for only the second time
ever.
By late February,
gold was up 39.6% since its mid-November panic lows. I figured this
would end all argument about whether gold was really in a new upleg
or not. The difference between a mere technical rally out of
oversold levels and an upleg is simply a question of magnitude and
duration. And after a 40% move higher in just over 3 months, this
was obviously something much more significant than a technical
bounce. Over this very span, the S&P 500 fell 12.8%. Gold
should have been the markets? rockstar.
Then in late
February, which isn?t surprising since gold was so far above
resistance, it fell sharply. Incredibly this decline convinced most
mainstreamers and many contrarians that gold?s rally was over. It
led to the widespread belief that gold was doomed whenever the
beleaguered stock markets staged their inevitable recovery rally.
Yet this
gold-opposing-stocks notion was a negative-sentiment-inspired
falsehood that recent market history certainly didn?t support.
By early March,
gold had fallen 9.6% in 11 days. Even though this metal was near
$900, a very impressive price historically, its sentiment was
pretty poor. This was most apparent in the dismal performances of
the gold stocks, which are the ultimate proxy on how traders feel
about gold?s prospects. Again I marveled at all the bearishness.
Not only was gold still looking great, but its technicals showed
nothing at all to be concerned about.
When gold was at
$897 on March 10th, it was right at both its upleg?s support line
and its 50dma. Both technical zones had provided strong support in
previous sharp gold pullbacks. And it wasn?t like this latest gold
pullback was the first of this upleg. Gold had fallen sharply in
early December and mid-January, by very similar percentage amounts
over very similar timeframes, yet gold?s upleg was not compromised.
Why bet against gold at support and its 50dma when these levels have
held strong for months?
Just as we?d done
since late October, at Zeal we continued aggressively buying elite
gold and silver stocks with gold low in its upleg?s trend channel.
There was absolutely nothing to fear in early March, including a
massive stock-market rally. Yet gold traders had somehow managed to
convince themselves that gold was going to plunge a lot farther
despite these undeniably bullish technicals.
Which brings us to
this week. Gold?s big surge that felt so enormous and awe-inspiring
Wednesday merely blends in as average in this upleg when viewed in
context in this chart. Yes, traders are right that the Fed?s crazy
inflation is going to spawn huge gold investment demand which will
drive a new upleg. But they are certainly late in realizing this.
Big inflation
coming has been obvious for many months now and gold?s new upleg
was already beautiful and very well-established before this week?s
events.
So what?s driving
gold higher? Strong gold investment demand. The carnage of the
stock panic is making more investors realize what they should have
known all along. Every investor?s portfolio should have some
gold exposure, at least 5%, all the time. Gold is an anchor
of stability in a world with none, and having even a modest fraction
of one?s capital in gold greatly reduces overall portfolio
volatility and risk.
The big driver of
gold?s strong surge from $810 in mid-January to $992 in late
February, an awesome 22.5% mid-upleg rally in only 5 weeks, was
unprecedented gold investment demand from traditional
stock-market investors. They were aggressively buying GLD, the
world?s largest gold ETF by far, at a phenomenal rate. GLD?s
custodians dutifully equalized this excess buying pressure directly
into physical gold bullion.
This next chart
shows GLD?s gold holdings, in metric tons, over this wild
stock-panic span. They reveal stock-market capital flowing into
gold at rates and magnitudes never before witnessed in all of world
history. GLD is such a crucial component of today?s gold upleg that
if you are not following GLD you won?t understand why gold is moving
and where it is going.
GLD is the
ultimate proxy of traditional stock investors? interest in buying
gold. This is due to the mechanics underlying this ETF. GLD?s
mission is to track the gold price. In order to do this, it must
equalize any demand differentials between the GLD shares and
physical gold itself. If you aren?t familiar with this mechanism,
which is really important to understand, read
my latest essay
on GLD specifically.
When GLD share
demand grows at a faster rate than the underlying gold demand, GLD?s
price threatens to decouple to the upside. So GLD?s custodians
issue new GLD shares and use the resulting cash proceeds to buy
physical gold bullion for their vaults. Thus anytime GLD?s holdings
are rising, stock investors are demanding gold exposure at a faster
rate than gold?s own demand is growing.
The opposite is
true if GLD?s holdings are falling. In this case GLD share supply
exceeds gold supply so the custodians must sell some gold bullion
and use the resulting cash to buy back GLD shares to keep the ETF
tracking gold properly. Thus charting GLD?s holdings offers a
valuable glimpse into how stock-market investors are perceiving
gold. When they really want it GLD buys more gold and when they
don?t GLD sells gold.
Other than a brief
period in early September when GLD?s holdings fell, stock investors
have generally wanted to own this ETF to add gold exposure to their
own portfolios. This has led to such massive GLD growth in a short
period of time that I?m sure it wildly exceeded the expectations of
even GLD?s biggest fans. Generally stock investors were buying GLD
at a much faster rate than gold itself was being bought.
After GLD?s
holdings bottomed in early September, they surged after gold?s
massive 11.1% rally on September 17th rekindled investment interest
in gold. By early October, GLD?s holdings had exceeded the Bank of
Japan?s. This made GLD the world?s 7th largest owner of physical
gold bullion after 5 major central banks (US, Germany, France,
Italy, Switzerland) and the IMF.
Then during the
stock panic, when gold fell sharply due to the enormous US dollar
rally driven by flight capital, GLD?s holdings remained stable.
When GLD?s holdings are flat, it means the supply/demand balance for
GLD shares on the stock markets is nearly the same as that for gold
itself on the physical and futures markets. So stock investors
owning GLD were not selling at faster rates than traditional gold
traders in October.
GLD?s holdings
started rising again in late November, which certainly helped boost
gold?s fledgling upleg. But the real fireworks didn?t start until
gold?s January lows. At that point, GLD?s holdings started
exploding. For some reason, probably the continuing weakness in the
stock markets, stock investors flocked to add GLD to their
portfolios for gold exposure like never before. GLD?s holdings
rocketed upwards as its custodians shunted the excess ETF demand
directly into physical gold bullion, and records fell.
In late January,
GLD exceeded 800 tonnes for the first time ever. Soon after in
mid-February, the 900t and 1000t milestones were surpassed in quick
succession as well. If you look closely at this chart, it is
readily evident that the gigantic GLD demand from stock investors
mirrors the biggest gold rally of this upleg perfectly. It was GLD
buying, with traditional stock-market capital, that drove gold?s
22.5% gain ending in late February.
Gold then started
pulling back, but the GLD owners didn?t sell their shares at a
faster rate than gold?s selling so its holdings again remained
stable. And they soon started growing again in March as excess GLD
demand again developed. GLD?s holdings passed the Swiss National
Bank?s to make this ETF the 6th largest owner of gold bullion on the
planet. American stock investors, via GLD?s gold held in trust for
them, have become a force to be reckoned with in the gold world.
They have driven GLD?s holdings 76.5% higher
since September!
Now I certainly
realize GLD is controversial in some circles. But like it or loathe
it, this ETF is growing into a gold juggernaut. Its behavior is so
important now that I devoted the current issue of our acclaimed
Zeal Intelligence
monthly newsletter to exploring GLD and its implications for this
gold bull. Subscribe
today and learn how you can profit from GLD?s market impact.
First-time e-mail-PDF-edition subscribers will get a complimentary
copy of this popular March issue.
For our purposes
today though, realize that mainstream stock-investor demand
is driving this new gold upleg. And as GLD?s holdings? latest spike
higher on the Fed?s dire tidings of inflation showed, this
mainstream gold demand has clearly not run its course. Compared to
the vast pools of stock-market capital, and capital wasting away in
money-market accounts at zero yields, the global gold market is
tiny. Increasing mainstream gold demand could accelerate this
new gold upleg dramatically.
With
gold?s
fundamentals incredibly bullish today, GLD certainly isn?t the
only way for stock investors to ride gold higher. At Zeal we have
always enjoyed gold-stock investing and speculation. The best gold
stocks, unlike GLD, can really leverage the underlying gains in
gold. And provocatively, today the gold stocks are radically
undervalued
relative to gold because residual fears from the stock panic
have really frightened the traditional gold-stock traders.
While the big gold
producers will thrive, the truly epic gains will only arise in the
junior gold stocks. So we?ve spent the past several months
painstakingly researching the universe of junior golds. After many
hundreds of hours, we?ve whittled this massive list down to our 12
favorites in this high-risk high-reward realm. And we just finished
summarizing their fundamental prospects in a
comprehensive new
report. If you are interested in learning about elite
high-potential junior-gold stocks,
buy our new report
today.
The bottom line is
gold is indeed in a new upleg. But this week?s inflationist-Fed
announcement, while it will accelerate this gold upleg, certainly
didn?t ignite it. Gold has already been powering higher for over 4
months now. This upleg?s technicals have been textbook-perfect and
very bullish. The Fed-driven inflation spike, while exciting, is
merely a blip within this already well-established uptrend.
And as the
breathtaking growth in GLD?s holdings reveals, it is mainstream
stock investors who are leading this charge into gold. Even before
the Fed declared to the world it was going to inflate without limit,
stock demand via this ETF was hitting records. All this newfound
awareness of the coming inflation should accelerate this bullish
trend for mainstream investors to prudently add gold exposure to
their portfolios.
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