Gold’s new major upleg

Over the next couple weeks the benchmark US Dollar Index surged 1.8% higher, extending its massive bear rally since mid-July to 7.3%. Gold wilted as the dollar surged, plunging 5.3% in that span. The gold-futures speculators who dominate gold’s short-term price action look to the dollar for their primary trading cues. Gold dropped as low as $1,820 in early October, knifing below an important technical milestone.

Like all secular bull markets, gold’s meander through upleg-correction cycles. Its last upleg powered a big 26.3% higher over 7.2 months into early May. Uplegs crest because herd greed grows excessive and sucks in all available near-term buyers. Subsequent selloffs are necessary to rebalance sentiment and technicals. They are classified as either pullbacks or corrections, with the dividing threshold running 10%.

Before late September’s hawkish 2024 dots, gold’s total selloff was 7.9% at worst. That was still pullback-grade, meaning gold’s upleg was technically intact. But as that post-hawkish-surprise selloff mounted, gold edged into formal 10%+ correction territory as October dawned. A few days later, gold’s total selloff extended to 11.3% as that recent nadir was hit. Gold rolling over into a correction reset its upleg cycle.

That’s a big deal technically. Since pullbacks are mid-upleg rebalancings within still-running uplegs, they don’t reset potential upleg gains. At that 26.3% in early May, gold’s latest upleg was already quite large. It could’ve grown bigger still, as a pair of monster gold uplegs crested up 42.7% and 40.0% in 2020! This latest upleg challenging those mighty 40%ish gains was probably its best-case upside scenario.

And that would’ve been awesome had that gold upleg not been prematurely truncated by the Fed. A 40% upleg off late September 2022’s deep stock-panic-grade $1,623 low would’ve catapulted gold back up near $2,275. That would’ve been way into nominal-record-high territory, way exceeding gold’s August 2020 all-time closing peak of $2,062. Besting that would’ve required a marginally-bigger 27.0% total upleg.

But this latest hawkish-Fed-induced gold correction formally slayed that last upleg, so a new one was just born a few weeks ago. And that started from a much-higher base of $1,820. From there gold would only need to rally a modest 13.3% to achieve new record closes, which is just a small upleg by gold standards. And as of midweek, gold’s sharp mean-reversion bounce has already covered fully 2/3rds of that ground!

New nominal record closes are merely 4.1% higher from here, which is within spitting distance. Since its latest bottoming, gold has enjoyed big daily rallies of 1.8%, 3.2%, 1.4%, and 1.3%. 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.

As an alternative asset, gold usually flies under the radars of most investors. But bullish financial-media coverage of gold will explode as it challenges and hits new record closes. That will quickly spread awareness of gold’s young upleg, and increasingly stoke widespread greed. The resulting big investment capital inflows will become self-feeding. The more investors buy, the higher gold rallies, the more they want to buy.

That has great potential to ultimately grow this new major upleg into a monster rivaling 2020’s 40%+ ones. Gold hasn’t enjoyed strong investment demand since then, with gold investors largely missing in action in recent years. A 40% upleg from gold’s recent lows would leave it way up near $2,550! The long string of new record highs between $2,062 and there would fuel great investor enthusiasm for reallocating into gold.

Today’s young gold upleg has very-high odds of growing into major status over 20% gains because of how gold uplegs are fueled. They are driven by three distinct sequential stages of buying. The first is gold-futures short-covering buying, the second gold-futures long buying, and the third investment buying. These are telescoping, growing increasingly larger and requiring the prior stage’s gold gains to ignite them.

Despite gold’s scorching V-bounce in recent weeks, the stage-one gold-futures short covering isn’t even expended yet. And the much-bigger stage-two gold-futures long buying has barely even started! Later the enormous stage-three investment buying will ignite off super-low base levels, portending massive gold upside. This chart reveals how both types of speculators’ gold-futures buying have stacked up in this upleg.

Gold is superimposed over total spec longs and shorts published in the weekly Commitments of Traders reports. This data current to Tuesday closes isn’t released until late Friday afternoons. So the latest CoT data available when this essay was published was as of October 17th. Gold closed at $1,922 that day, and has blasted much higher to $1,980 since. So specs have done more buying than this chart shows.

With investors mostly abandoning gold in recent years, spec gold-futures trading has driven all its uplegs and corrections. All are noted here, along with the changes in spec longs and shorts that fueled them. In gold’s last powerful 26.3% upleg into early May, specs added 54.9k long contracts while buying to cover another 87.3k short ones. That added up to gold-equivalent buying of 442.2 metric tons, which is quite large.

And the main reason gold fell 11.3% in that new correction since into early October was specs dumped 36.3k longs while adding 69.3k shorts. That combined for a hefty 328.5t of gold-equivalent selling! So it is no wonder gold plunged into that recent violent breakdown, specs were selling gold futures like crazy. Due to the extreme leverage inherent in that realm, gold-futures trading has an outsized price impact on gold.

This week each contract controlling 100 ounces of gold only required traders to maintain low $7,800 cash margins in their accounts. Yet at midweek gold prices near $1,980, each contract had a notional value way up at $197,980. That enables extreme maximum leverage up to 25.4x, which makes each dollar traded in gold futures 25x more potent in bullying around gold prices than a dollar invested outright!

Gold’s latest plunge after Fed officials upped their year-end-2024 federal-funds-rate projections was mostly fueled by an enormous gold-futures shorting spike. In just three CoT weeks, specs short sold a massive 45.7k contracts catapulting their total shorts way up to 174.4k! That’s extreme by any standards, almost matching the 3.8-year secular high of 185.3k in late September 2022 that birthed gold’s last 26% upleg!

Excessive shorts weren’t sustainable then, and they aren’t now. Shorting gold futures at maximum leverage is exceedingly risky. At 25x, a mere 4% gold move against specs’ bets wipes out 100% of their capital risked! So they can’t afford to be wrong for long. Once gold bounces decisively for any reason, they rush to buy to cover to close those downside bets. That buying stampede just started in mid-October.

In that last-reported CoT week ending October 17th, specs covered an utterly-colossal 30.1k contracts! That ranked as the 9th largest on record out of 1,294 CoT weeks since early 1999! Interestingly that was very similar to early-October-2022’s initial 29.2k of single-CoT-week short-covering buying that ignited gold’s last 26% upleg. This latest frenzied and frantic short covering is why gold V-bounced sharply higher.

The secular support zone for total spec shorts is around 95k contracts. From late March to early August, spec shorts were right there averaging a tight 94.1k. This latest shorting spike didn’t erupt until Fed-hawkish economic data soon revised lower ignited a gigantic US-dollar bear rally. Today’s stage-one gold-futures short-covering buying should run until spec shorts mean revert back down near their 95k support.

That left 49.3k contracts of more room for covering as of October 17th. But a sizable-to-big chunk of that had to happen in this latest not-yet-reported CoT week ending this Tuesday, since gold soared a big 2.6% higher within it. I’d bet about 35k contracts are left, but we can conservatively assume 30k. That is fully as much short-covering buying likely still coming as during that initial CoT week that catapulted gold higher.

It is only a small group of traders willing to flirt with ruin shorting leveraged gold futures, and they don’t command much capital. So their stage-one short-covering buying quickly burns out, usually in several weeks or so. But that ignites uplegs, driving gold high enough for long enough to start enticing back way-larger spec gold-futures long buying. Over the last 52 CoT weeks, total spec longs outnumbered shorts by 2.5x.

So stage-two gold-futures long buying is proportionally larger, accelerating young gold uplegs. As of that latest-reported October 17th CoT, total spec longs were still down near 272.3k contracts. That’s on the lower side of their secular trading range, and not too far above late November 2022’s deep 3.6-year secular low of 243.1k. The upper resistance zone for total spec longs in recent years has run near 413k contracts.

Speculators have massive room to buy back longs before they near those exhausted gold-upleg-slaying levels. That’s an enormous 140.7k contracts higher than October 17th levels, which equates to a gigantic 437.7t of gold-equivalent buying! But specs probably did sizable-to-large long buying in this newest CoT week to this Tuesday not yet reported. Conservatively they probably now have at least 125k contracts left to do.

Add together 30k of likely remaining stage-one short covering and 125k of stage-two long buying, and we are looking at gold-futures speculators having 482.1t of probable buying firepower left! Remember gold’s entire last 26% upleg into early May was fueled by a smaller 442.2t of gold-equivalent spec gold-futures buying. So gold’s new major upleg powering another 25% higher to $2,275 doesn’t look like a stretch at all.

Again that would propel gold way up into new-record-high territory way above that old $2,062 peak. The financial media would breathlessly cover that, fanning up widespread popular greed attracting back much investment capital. That stage-three investment buying ought to supercharge this gold upleg, potentially lifting it into monster ranks over 40% gains. Investors have all but abandoned gold, they could do epic buying.

Global gold investment demand is only published quarterly by the World Gold Council in its excellent Gold Demand Trends reports. But a great daily high-resolution proxy for that is the combined gold-bullion holdings of the world’s largest gold ETFs, the mighty American GLD and IAU. Unbelievably just last week, those slumped to an extreme 3.8-year low even under March 2020’s in the pandemic-lockdown stock panic!

Gold is so deeply out of favor that investors want nothing to do with it. Another proxy for American stock investors’ gold portfolio allocations confirms that. Exiting September, all the elite S&P 500 stocks had a collective market capitalization of $38,218.4b. Yet the gold-bullion holdings of both GLD and IAU were merely worth $77.1b. That implies American stock investors have just 0.2% of their assets invested in gold!

For all intents and purposes, that’s essentially zero. Investors are going to remember gold as it forges into new record-high territory soon, and start chasing its upside. The most-powerful gold uplegs are fueled by big stage-three gold-investment demand. The 42.7% one cresting in March 2020 right before that stock panic was partially driven by GLD+IAU holdings soaring 30.4% or 314.2t. The next one was even better.

After that anomalous unsustainable stock-panic selloff similar to gold’s recent violent breakdown, gold soared 40.0% into October 2020. Investors flocked back in droves as gold achieved new record highs, with GLD+IAU holdings skyrocketing another 35.3% or 460.5t! Another huge 30% build off the recent early-October-2023 gold-low levels would equate to 383.4t, and that’s on top of all that gold-futures buying.

So gold’s new upleg is almost certain to grow into major status because there’s still likely around 482t of gold-equivalent gold-futures buying and 383t of gold investment buying left. That adds up to a vast 865 metric tons! But again I’d guess this is too conservative. As gold challenges and bests new nominal record highs, demand should explode as speculators and investors alike rush to chase it and ride its big gains.

Gold’s new major upleg should easily hit 25% gains, and probably 40%, before giving up its ghost. But gold only needs to rally about 4% from here, or 13% in total-upleg terms, to start carving new record highs. Those should change everything sentimentally, igniting and fueling gold demand like hasn’t been seen for years. The battered gold stocks will be the biggest beneficiaries of gold’s new upleg stoking popular greed.

The major gold miners of the leading GDX ETF tend to amplify material gold moves by 2x to 3x. And they are likely to achieve record profits growth in their imminent Q3’23 earnings season, attracting back fund managers. GDX’s parallel uplegs during 2020’s monster 40%+ gold ones averaged excellent 105.4% gains! During gold’s last 26% upleg earlier this year, GDX powered up 63.9% higher at best in mid-April.

The major gold stocks really run during major gold uplegs, rapidly multiplying capital. But the smaller fundamentally-superior mid-tiers and juniors really outperform their larger peers. Their stocks are easier to bid higher with lower market caps, and they are better at growing their production from lower bases. Today our newsletter trading books are full of great smaller gold miners likely to soar with gold’s new upleg.

The bottom line is a new major gold upleg is gathering steam. Pummeled lower by heavy gold-futures short selling after a Fed-hawkish surprise, gold V-bounced sharply on huge covering buying. Despite that fast recovery, speculators still have massive gold-futures buying left to normalize their excessively-bearish bets. Their stage-one short covering isn’t finished, and way-larger stage-two long buying has barely started.

That should easily propel gold deep into new nominal all-time-high territory in coming months. Record closes will drive extensive bullish financial-media coverage for gold, stoking widespread popular greed. That will increasingly entice back investors, who love chasing strong upside momentum. So this young gold upleg should have no problem attaining major status, and has real potential to grow to monster gains.

(By Adam Hamilton)