Gold upleg rockets back

Gold formally reentered bull-market territory as February dawned, extending upleg gains to 20.2% over 4.2 months. Sentiment was waxing greedy after that nice run, the yellow metal short-term overbought and due for a healthy pullback. That soon hit furiously on a rare convergence of three one-off events. After closing at $1,951 on February 1st, gold plunged 2.0% on the 2nd followed by another 2.4% on the 3rd!

I wrote a whole essay at the time analyzing that brutal 4.4% two-day selloff. The first day’s drop resulted from a dovish surprise from the European Central Bank. Its monetary-policy statement said it would likely only hike rates one more time before pausing. The euro fell on that, which goosed the oversold US dollar. Gold-futures speculators watch the US Dollar Index’s fortunes as their primary trading cue, then do the opposite.

The second day’s bigger tumble was driven by a Fed-hawkish huge upside surprise in key US economic data. January’s monthly US jobs report came in at a shocking eight-standard-deviation beat of 517k jobs added compared to +187k expected! That implied the US economy was overheating, pressuring the Fed to accelerate its most-extreme tightening cycle ever. But that blistering headline jobs growth was fabricated.

The Bureau of Labor Statistics responsible for it also publishes raw underlying US jobs data in its large monthly reports. That declared January’s 152,844k jobs actually fell 2,505k from December’s 155,349k! So the BLS forced through a record seasonal adjustment of +3,022k jobs to get that headline beat! The timing was suspicious, mere days before Biden’s State of the Union speech where he crowed about jobs growth.

Gold started recovering from that sharp two-day plunge, which quickly accomplished mid-upleg pullbacks’ mission of bleeding away excess greed. Over the next week in early February gold stabilized and started to rally, but that was truncated by a third never-before-witnessed event. At the end of January, a major futures-clearing and data firm suffered a ransomware cyberattack taking down its critical reporting systems.

Without that data, the Commodity Futures Trading Commission suspended publishing its all-important weekly Commitments of Traders reports! Among many other markets, these detail what speculators as a herd are doing in gold futures. With that essential data gone dark, they were flying blind. They had no idea how much selling they had collectively done, removing that moderating natural check on their trading.

So the CoT current to Tuesday January 24th was the last one reported for over a month! At the end of February the CFTC started releasing all the missed weekly CoTs sequentially every few trading days. It didn’t get fully caught up until this Tuesday March 21st! That unprecedented lack of crucial CoT data on specs’ gold-futures trading almost certainly exacerbated gold’s volatility over the past seven weeks.

Those gold-futures guys dominate gold’s near-term price action because of the crazy leverage they run. This week each 100-ounce contract controlling $196,900 worth of gold only required traders to keep $8,000 cash margins in their accounts. That enables maximum leverage up to 24.6x, which isn’t unusual at all. In early February, that calculation worked out to 27.2x! Over time it generally averages around 25x.

Running that extreme 25x, every dollar specs deploy in gold futures has 25x the gold-price impact as a dollar invested outright! And at 25x, a mere 4% gold move against these bets will wipe out 100% of the capital risked! So gold-futures speculators not only bully around gold prices, but their time horizons are ultra-myopic measured in hours by necessity. They can’t afford to be wrong for long with that kind of risk.

I’ve been impatiently waiting seven weeks to see this chart, which finally includes all those back CoTs! It superimposes gold action over specs’ total gold-futures long and short contracts in recent years. This missing data explains both why gold plunged so hard in such a sharp pullback in February then rocketed higher to achieve new upleg highs in March. And these traders still have massive room to keep buying!

The key to understanding gold-futures trading’s impact on gold prices is realizing these traders’ capital firepower is quite limited. There aren’t many speculators fearless or crazy enough to want to run extreme 25x leverage on anything. So overall spec gold-futures positioning trends run in channels, which are tradable. When gold investors are missing in action, gold futures drive gold uplegs, corrections, and reversals.

After crunching this arcane CoT data various ways over the past couple decades, I’ve found most useful is considering spec gold-futures long and short positioning as percentages of their latest 52-week ranges. The most-bullish near-term setup for gold is when total spec longs are at the bottom of their range near 0%, while total spec shorts are way up around 100%. Together that implies their likely selling is exhausted.

Conversely the opposing 100% longs and 0% shorts is the most bearish for gold, as speculators’ capital firepower for buying has been mostly expended. And as you can see in this chart, spec longs outnumber spec shorts. That makes longs proportionally more important for gold’s near-term price action. Over the latest 52 weeks of CoT data, total spec gold-futures longs exceeded their total shorts by an average of 2.3x.

In the last-published CoT before that cyberattack current to January 24th, spec longs were running just 33% up into their past-year range with spec shorts 32% up into their own. That implied these leveraged traders had about 2/3rds of their probable gold-upleg-fueling long buying left to do, and 1/3rd of their smaller short-covering buying. Far from an upleg-slaying 100% longs and 0% shorts, gold had big room to run.

While that first delayed CoT current to January 31st wasn’t released until the end of February, spec gold-futures positioning hadn’t budged on the eve of gold’s violent 4.4% two-day plunge. Spec longs still ran 32%, and spec shorts 31%. Given how hard gold plummeted on that ECB dovish surprise and fabricated US-jobs beat, then I figured speculators had to be heavily shorting gold futures. But that didn’t prove true.

The CoT encompassing that gold-hammering week ending February 7th wasn’t released until early March. Shockingly it was the long-side speculators who panicked, dumping an extreme 29.0k contracts in that single CoT week! That’s why gold plunged 3.0%. Specs actually did a little short-covering buying, as their total shorts slipped 1.5k contracts. That massive long-side flight was really big by historical standards.

It ranked as the 44th largest out of all 1,258 CoT weeks since early 1999, or top 3.5%! Any swing of 20k+ contracts on either the long or short sides in any single CoT week qualifies as huge. That left total spec longs just 16% up into their past-year trading range and total spec shorts 29% up into their own. Had these hyper-leveraged traders known they had done so much selling, they likely would’ve really dialed it back.

But with CoTs dark they couldn’t know, so they kept on dumping gold futures. In the next CoT week that ended February 14th, they sold another large 15.6k longs while adding 8.4k shorts. Together that added up to a massive 23.9k contracts of selling, rivaling the previous CoT week’s 27.6k! Total spec longs had cratered to only 7% up into their past-year range, down near the 0% which actually births major gold uplegs.

With spec longs 2.3x more important than shorts, had these traders known that they probably would’ve started buying back in ending gold’s healthy mid-upleg pullback. But without that essential data to check their collective trading, they continued gradually selling into late February. Gold’s excessive pullback grew to 7.2% over 0.8 months by February 24th, when it closed at $1,811. Spec longs had collapsed to 4%!

While unknown until mid-March as those back CoTs were slowly released, that was wildly bullish for gold. With speculators holding just 250.4k total gold-futures long contracts, they were back down to levels last seen in the CoT week ending December 6th. But gold had been considerably lower then earlier in its upleg, at just $1,772. Specs’ upleg-driving buying had largely been reset, without unwinding all gold’s progress!

Over the next CoT week into March 7th, gold started to rebound but that fizzled out. The culprit was renewed gold-futures selling. Specs did add 8.8k longs, but that was more than offset by a large 17.4k of new short selling. Together that added up to 8.6k contracts dumped, the most in several weeks. That left specs’ longs and shorts running only 10% and fully 52% up into their past-year trading ranges, very gold-bullish.

That was getting closer to gold’s most-bullish near-term setup of 0% longs and 100% shorts, implying a powerful gold rally was imminent. Indeed that soon came to pass. Having that ultra-myopic super-near-term focus, gold futures speculators usually need some catalyst to start buying. That started on March 9th as the benchmark S&P 500 US stock index plunged 1.8%, led by bank stocks on mounting insolvency fears.

Some larger regional banks have big investments in shorter-term US Treasuries, with around half their assets deployed. That gave their portfolios huge duration risks as interest rates skyrocketed over the past year on the Fed’s crazy-extreme hiking cycle. After an epic 450 basis points of hiking in just 10.6 months, even safe Treasuries’ prices were plunging after being issued at much-lower prevailing interest rates.

So some banks faced enormous unrealized losses on their bond portfolios so big they exceeded equity, leaving them technically insolvent. Gold only climbed 1.0% that day, but surged 2.0% to $1,868 on March 10th after the 18th-largest US bank suffered a full-blown run on its deposits. Silicon Valley Bank had 57% of its assets invested in shorter-term bonds, mostly Treasuries. Regulators forcibly shuttered it later that day!

Gold blasted that 2.0% higher partially on new safe-haven buying as bank-implosion fears mounted. But there was probably a bigger reason. With a banking crisis underway, the Fed would be hard-pressed to keep hiking rates aggressively even as inflation continues to rage. So the futures-implied terminal federal-funds-rate level just crashed, plummeting 105bp to 4.65% in just three trading days into March 13th!

With rate-hike odds cratering, the USDX which had rocketed parabolic last year on monster rate hikes fell hard. In that short span it dropped 1.9%, which triggered huge gold-futures buying by the specs. That soon becomes self-feeding, with other traders flooding in to chase gold’s upside momentum which quickly amplifies it. So gold blasted up a gigantic 5.5% during those three trading days, capped by a 2.4% surge to $1,913.

Overall in that latest-reported CoT week current to March 14th, gold soared 4.9%. That final catch-up CoT report was released a couple trading days late this week. It revealed specs bought a sizable 13.4k longs while buying to cover a huge 23.1k shorts, adding up to a colossal 36.5k contracts of buying! That ranked 39th out of all 1,263 CoT weeks since early 1999, or top 3.1%. Specs were returning with a vengeance.

But amazingly since they had just done so much dumping since early February, total spec longs stayed quite low at just 20% up into their past-year trading range! Total spec shorts 28% up into their own were merely back near late-January levels before all of this craziness. So about 4/5ths of specs’ long-side gold-upleg-fueling buying firepower remained, as well as over 1/4th of their potential short-covering buying.

In recent years, that 2.3x-more-important spec gold-futures-long positioning has carved a major upper resistance line near 413k contracts. As of March 14th with gold at $1,903, total spec longs were still just 272.6k which was right at February 7th levels after gold’s brutal plunge to $1,871. To get back up to that gold-upleg-slaying resistance, speculators still had room to buy another colossal 140.4k long contracts!

Major gold uplegs are driven by three progressively-larger stages of buying. First is spec gold-futures short covering, second spec gold-futures long buying, and finally vastly-bigger gold investment buying. Even after gold rocketed higher into mid-March, some of the former, the great majority of the middle, and nearly all the latter remained! That all but guarantees this gold upleg has a long ways higher to run yet!

Some smaller fraction of that gold-futures-buying firepower was expended in the latest CoT week ending this Tuesday March 21st, which should be reported on schedule this afternoon. Gold blasted as high as $1,978 this Monday, hitting major new upleg highs. But odds are total spec long positioning still isn’t much higher than late January’s 32% levels. The majority of this young gold upleg’s futures buying is still coming.

Zooming out to whole-upleg scale, between late September 2022 to early February 2023 gold soared 20.2% reentering a bull market. That was fueled by speculators buying 45.3k longs while buying to cover 59.7k shorts, 105.1k contracts total. As of the latest March 14th CoT, that had actually declined to specs buying 17.6k longs and covering 62.5k shorts for 80.0k total contracts! That’s less than half of potential buying.

That is closer to 170k contracts, derived from the trading ranges above for total spec longs and shorts. So again this resurgent gold upleg underway looks quite young. Gold is poised to rocket much higher here before this upleg gives up its ghost on exhausted buying. There’s really no reason gold’s gains shouldn’t at least double to 40% from the current 20%. In 2020, two massive gold uplegs crested up 42.7% and 40.0%.

Another 40% bull upleg off late September’s anomalous lows driven by the USDX soaring parabolic on extreme Fed rate hikes would catapult gold way up near $2,275! Spec gold-futures buying should persist on momentum, which will also soon increasingly attract back investors. Gold investment demand ought to soar with inflation raging out of control, while the Fed’s banking crisis soon ends this extreme tightening cycle.

General price levels are surging because the Fed more than doubled the US money supply in the couple years after March 2020’s pandemic-lockdown stock panic. Emergency borrowing by banks in the week that Silicon Valley Bank went under catapulted the Fed’s balance sheet 3.6% higher. Way up at $8,639b, it is still 108% higher than right before that stock panic! So this inflation super-spike remains far from over.

During the last two inflation super-spikes in the 1970s, monthly-average gold prices from trough to peak CPI months literally nearly tripled in the first before more than quadrupling in the second! As investors increasingly realize the Fed’s extreme rate hikes have failed to kill inflation and not addressed its driving excessive-money-supply problem, they will flood into gold. That should supercharge its investment demand.

The biggest beneficiaries of much-higher gold prices coming will be the gold miners’ stocks. Their profits really amplify gold price trends, leading to outsized gains during major gold uplegs. Larger gold stocks can easily double in a big gold upleg, while fundamentally-superior smaller ones fare much better. All speculators and investors should be upping their gold-stock portfolio allocations with gold blasting higher.

The bottom line is gold’s interrupted upleg is rocketing back to new highs. Early February’s huge gold-futures selling on an unusual confluence of one-off events has reversed into massive buying. That was initially catalyzed by this unfolding banking crisis spawned by the Fed’s extreme rate hikes over this past year. But surging gold’s upside momentum is taking over, increasingly attracting back traders to chase its gains.

Despite gold soaring in recent weeks, the majority of speculators’ likely gold-futures buying is still yet to come. And the subsequent far-larger investment buying has barely started. So enormous buying capital firepower remains to drive gold much higher. As its latest bull upleg continues growing, gold stocks will amplify their metal’s gains like usual. Traders will increasingly flock back to the miners, catapulting them higher.

(By Adam Hamilton)