Gold-record momentum

“Gold’s last nominal record close was August 2020’s $2,062. Despite the last couple weeks’ carnage, that is only 13.2% higher from here. …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.” That meant a major new gold upleg was coming.

The excessive spec shorts then “guarantees huge mean-reversion short-covering buying is imminent, which will catapult gold sharply higher.” That indeed soon came to pass, as just several weeks later gold had blasted back up to $2,005! Then I analyzed gold’s new major upleg, pointing out record territory was much closer. “New nominal record closes are merely 4.1% higher from here, which is within spitting distance.”

Gold had enjoyed some big daily rallies in mid-October on gold-futures mean-reversion buying, thus “A few more up days like these will start writing gold into the record book. That will change everything for gold psychologically, starting to attract in legions of new investors. They love chasing winners with strong upside momentum.” Gold took a breather with a 3.4% pullback in early November, then came roaring back.

Gold’s assault on records intensified on November 28th, when it surged 1.3% to $2,040 on a usually-hawkish Fed governor waxing dovish. That was a decisive 1%+ breakout above the psychologically-huge $2,000 level, driving more sector interest and bullishness. Then a few days later on last Friday December 1st, gold blasted up another 1.7% to a $2,071 US close! Again dovish Fedspeak was behind that strength.

That day was top Fed officials’ last opportunity to talk about monetary policy ahead of their mid-December FOMC meeting. Fed-imposed blackout periods on speaking publicly start two Saturdays before those Wednesday FOMC meetings. The Fed chair spoke at an Atlanta college that day, but failed to push back against traders’ growing expectations rate cuts are coming soon. Jerome Powell sounded quite dovish at times.

Markets latched on to his comment, “The strong actions we have taken have moved our policy rate well into restrictive territory, meaning that tight monetary policy is putting downward pressure on economic activity and inflation. Monetary policy is thought to affect economic conditions with a lag, and the full effects of our tightening have likely not yet been felt.” Futures-implied March rate-cut odds doubled to 80%!

Just a week earlier they had been running 10%, so Powell not sounding very hawkish triggered a violent repricing in rates. That forced the US dollar lower, helping ignite a big gold-futures bid catapulting gold up to $2,071. That was gold’s first new nominal record close since August 6th, 2020’s $2,062 fully 3.3 years earlier! And gold’s young upleg was still merely up 13.8% in 1.9 months, on the smaller side of precedent.

Gold’s big surge back into record territory happened while overseas markets were closed. So when they reopened late Sunday New York time, frenzied momentum-chasing buying quickly bid gold way up near $2,135! But that big-and-fast spike left gold short-term overbought, so selling soon emerged forcing it down near $2,068 entering Monday US trading. That record close changes everything, despite gold pulling back.

This chart looks at gold technicals over the past four years or so. Gold tried and failed to achieve new nominal records in early March 2022 and early May 2023. Those attempts formed a horizontal secular upper-resistance line at $2,050. Along with rising lower support in recent years, that formed a colossal ascending-triangle technical formation. Breakouts above such classic continuation patterns are very bullish.

This ascending triangle’s resistance has been perfectly defined for several years, but support suffered a serious breakdown in mid-2022. While that hammered gold to a deep 2.5-year low, it was a short-lived anomaly driven by unsustainable extremes. The US Dollar Index had skyrocketed an extreme 16.7% in just 6.0 months to an extreme 20.4-year secular high on the most extreme rate hikes in the Fed’s entire history!

That included four back-to-back 75-basis-point monsters, along with record quantitative-tightening bond selling! Gold-futures speculators watch the USDX for their primary trading cues, doing the opposite. So the resulting gold plunge last summer was extreme and guaranteed to soon unwind, thus I argued at the time that Fed dollar/gold shock was ending. Gold surged back up over support faster than it had fallen below.

Since that extreme anomaly quickly reversed, gold’s secular support is better defined by the four other major lows in recent years. This is a textbook ascending triangle, slowly filling in over a long secular time frame at a gigantic price scale. Last Friday’s decisive upside breakout from its $2,050 upper resistance is a huge deal. Investopedia’s excellent explanation of ascending triangles in technical analysis explains why.

“Once the breakout from the triangle occurs, traders tend to aggressively buy or sell the asset depending on which direction the price broke out. … Increasing volume helps to confirm the breakout, as it shows rising interest as the price moves out of the pattern. … A profit target can be estimated based on the height of the triangle added or subtracted from the breakout price. The thickest part of the triangle is used.”

That latter revelation is stunning for gold, as its ascending triangle is so darned big. It was born with a massive range from about $1,650 to $2,050, or $400! That implies gold could challenge $2,450 before this breakout upleg runs out of steam. While that sounds like a crazy-optimistic pipe dream, it is actually quite plausible based on historical precedent. Gold’s last breakout to record highs fueled enormous buying.

That happened after March 2020’s pandemic-lockdown stock panic, which slammed gold 12.1% lower. Note in this chart that anomalous breakdown was very similar in profile and magnitude to mid-October’s recent 11.3% one birthing today’s upleg. Gold bottomed in mid-March 2020, then forged back up into nominal record territory in early April. While new records weren’t hit every day, gold ground higher on balance.

Fully 83 trading days elapsed from that first record close to when that gold upleg peaked, with only 30 of those seeing new records. Yet those generated so much excitement and greed that investment demand for gold just skyrocketed. Investors love chasing winners, and nothing fuels frenzied fear-of-missing-out buying like new records. The combined holdings of the mighty American GLD and IAU gold ETFs reveal this.

Dominating global gold ETFs, they are the best proxy for world gold investment demand. Incredibly in just 4.6 months, GLD+IAU holdings soared a gargantuan 35.3% or 460.5 metric tons higher! That fueled a mighty 40.0% gold upleg ultimately peaking at that last record close of $2,062 in August 2020. And such huge gold uplegs aren’t rare. The pre-stock-panic one before that blasted up 42.7% before rolling over!

For this current ascending-triangle-breakout target of $2,450 to be reached, today’s gold upleg would only have to grow to 34.7% off early October’s major interim low. While definitely big, this is still considerably smaller than those last couple uplegs when gold forged new record highs cresting in 2020. While $2,450 is achievable, personally I’m more comfortable looking for a conservative 25% upleg taking gold near $2,275.

From its anomalous late-September-2022 low on that Fed-rate-hike-fueled USDX moonshot to early May this year, gold enjoyed a strong 26.3% upleg. For today’s young one to ultimately grow to 25%, 30%, or maybe even monster 40% gains would again require big investment buying. And there’s lots of room for that in GLD+IAU holdings alone. Having given up on gold, investors have huge mean-reversion buying to do.

In mid-October, GLD+IAU holdings slumped to a deep 3.8-year secular low of 1,254.2t. American stock investors had virtually zero gold exposure. Exiting that month, those ETFs’ gold bullion was worth $80.5b at $1,984 gold. That was a trivial 0.2% of the combined market capitalization of the elite S&P 500 stocks’ $37,171.1b! So for all intents and purposes, American stock investors had almost nothing allocated to gold.

Before the Fed’s extreme-rate-hiking anomalies last year, GLD+IAU holdings were running a way-more-normal 1,625.8t in mid-April 2022. That remained well under their record high of 1,800.5t in mid-October 2020, a couple months after gold’s last record close was achieved. But even just to mean revert back up to the former, American stock investors would have to buy enough GLD and IAU shares to fuel a 371.7t build!

That much differential gold-ETF-share demand is right in line with the huge buying seen during those monster 40%+ gold uplegs cresting in 2020. The earlier 42.7% one enjoyed a 314.2t GLD+IAU holdings build, while the later 40.0% one had that huge 460.5t. Their average is 387.4t, very similar to the 371.7t necessary to merely mean revert back to early 2022’s pre-Fed-rate-hike bullion levels. That is easily doable.

Heading into gold’s August 2020 peak, that ratio of the value of GLD+IAU holdings to the S&P 500’s total market cap ran 0.4%. So it doesn’t take a big shift in American stock investors’ gold allocations to launch this leading alternative asset way higher. Given the insane monetary inflation the Fed and other major central banks injected since that pandemic-lockdown stock panic, gold allocations should grow way bigger.

It wouldn’t surprise me to see 1% to 2% before markets fully adjust. From late February 2020 to mid-April 2022, the Fed expanded its balance sheet a dumbfounding 115.6% or $4,807b in just 25.5 months! That is the monetary base underlying the US money supply, explaining the raging inflation since. With money more than doubled, prices on most goods and services have soared proportionally to reflect that deluge.

But gold hasn’t fully normalized yet. In the weeks leading into that March 2020 stock panic, gold was only running $1,675 at best. Despite big quantitative-tightening bond selling since mid-April 2022 when the Fed started fearing the inflation monster it unleashed, the Fed’s balance sheet is still 87.5% or $3,638b above February 2020 levels. Gold would have to soar over $3,140 to proportionally reflect that monetary growth!

Again investors love chasing winners, so the longer and higher gold powers the more attractive it gets to more investors. There’s nothing more potent for fueling this virtuous circle of big buying than new record highs and their extensive financial-media coverage. The more gold rallies, the more records it achieves, the more investors shift capital into it, the more its gains mount making these capital inflows self-feeding.

And it’s important to realize that last week’s new gold record is just nominal, not adjusted for inflation. In real inflation-adjusted terms even using the intentionally-lowballed US Consumer Price Index, gold’s all-time-record close was actually $3,361 in today’s dollars in January 1980! So gold has at least another $1,300 or so to run from here before finally achieving true real records, its ultimate upside potential is vast.

While investment buying is the primary driver of major gold uplegs, it’s not the only one. They are fueled by three distinct sequential stages of buying, initially gold-futures short covering. That propels gold high enough for long enough to trigger much-bigger gold-futures long buying. Eventually that further boosts gold enough to attract back investors, with their vast pools of capital dwarfing the gold-futures speculators’.

As analyzed in all our weekly and monthly subscription newsletters, this young upleg’s stage-one short covering and stage-two long buying remain far from exhaustion. So gold’s ongoing breakout to more new nominal record closes can be driven for another month or two solely on gold-futures buying. Investors will start pouring in to chase those gains sooner or later, accelerating gold’s upleg potentially to monster status.

The biggest beneficiaries of gold’s record highs fueling big momentum buying will be gold miners’ stocks, particularly fundamentally-superior smaller mid-tiers and juniors. As analyzed in my essay last week, their latest quarterly results proved spectacular! Lower mining costs combined with higher gold prices fueled huge profits growth even before today’s gold upleg was born. Their earnings really leverage gold upside.

During gold’s last record-momentum-fueled upleg soaring 40.0% into August 2020, the benchmark GDX gold-stock index skyrocketed 134.1% amplifying gold’s gains by 3.4x! The major gold miners dominating it typically leverage material gold moves by 2x to 3x. But new gold records really attract outsized gold-stock buying, and the smaller gold miners we have long specialized in tend to well outperform the majors.

Our newsletter trading books are currently full of great smaller gold miners enjoying mounting unrealized gains. Yet most remain cheap and great buys, deeply undervalued fundamentally and/or still battered technically. Speculators and investors deploying before investors start flocking back to gold en masse will earn the fattest gains. If you enjoy my web essays, keep them coming and get deployed by subscribing today!

The bottom line is gold just achieved its first new nominal record close in several years! That came as a super-bullish upside breakout in a massive secular chart pattern, portending much-higher gold prices. Gold forging into record territory changes everything, generating enthusiastic financial-media coverage fueling widespread bullish psychology. That will increasingly attract back investors, accelerating gold’s gains.

They have virtually no gold portfolio exposure now, in an inflationary world with money supplies still nearly doubled. Investors love chasing winners, and the more records gold accrues the more they’ll want to buy it. These virtuous circles of capital inflows as record closes drive big investment demand fuel monster gold uplegs. And the gold miners’ stocks soar as their metal powers higher, really amplifying its gains.

(By Adam Hamilton)