Fed Tests Gold Price Upleg / Commodities / Gold & Silver 2024

The Federal Reservesomehow surprised traders with a hawkish rate cut this week.  While that had been expected, apparently theFed’s projected rate-cut trajectory slowed even more than feared.  So market reactions were violent, includingthe US dollar blasting higher unleashing heavy gold-futures selling.  This is the latest in a long line ofFed-spawned tests of gold’s resilience, challenging its current monster upleg.

From early October 2023to late October 2024, gold skyrocketed 53.1% higher achieving a rare40%+ monster-status upleg!  Gold poweredto 43 new nominal recordcloses in that remarkable span, despite massive uplegs’ usual driver beingmissing-in-action.  Enamored with the AI stock bubble, Americanstock investors weren’t chasing gold’s upside momentum at all.  That’s evident in the dominant gold ETFs’holdings.

During that 12.9-monthspan, the combined holdings of the mighty GLD and IAU gold ETFs unbelievablyslumped 0.4%!  Big global demandcatapulted gold higher while Americans ignored it, led by Chinese investors,central banks, and Indian jewelry buyers. Despite gold pulling back since the elections, this monster upleg remainsalive and well.  Amazingly it has yet tosuffer a single upleg-slaying 10%+ correction.

Gold’s latest pullbacksurrounding Election Day clocked in at 8.0% total losses by mid-November,leaving it at $2,562.  The gold-futuresselling forcing gold lower was fueled by the US Dollar Index surging, withtraders figuring the Fed would slow its rate-cut cycle under Trump.  Sound familiar?  That’s exactly what happened mid-week afterthis latest FOMC decision.  Given thatbackdrop, markets’ sharp reactions were perplexing.

Back in mid-Septemberleading into elections, the FOMC not only executed its first rate cut in 4.5years but made it a crisis-level 50-basis-point one.  Top Fed officials meet eight times per yearto decide what to do with monetary policy, and every-other FOMC meeting isaccompanied by their economic projections. The most-important facet is the dot plot, where individual Fed guys seetheir federal-funds rate in coming years.

Three months ago they forecast100bp of total cuts in 2024 including that maiden one, followed by yet another100bp in 2025.  That benchmark USDX waspretty low then at 101.0, just 0.4% over a 13.3-month low several weeksearlier.  Yet despite the political Fedofficials trying to meddle with elections with that economically-unjustifiedoutsized cut to goose stock markets, Trump’s chances of winning started rising.

Over the next fiveweeks, the USDX surged 3.4% along with Trump’s betting-market odds ofvictory.  That trade assumed the Fedwould really slow its rate-cut trajectory if Trump won.  Something over 90% of the 400ish PhDeconomists working at the Fed are registered Democrats, the FOMC has a longhistory of being looser under Democrat presidents, and Republican lawmakershave challenged the Fed over the years.

Top Fed officials claimtheir decisions have nothing to do with politics, so they cited inflationarypressures under Trump.  Extensive tariffswill raise import prices, and big tax cuts extended will leave Americans withmore money to keep bidding up prices on goods and services.  Whether much-different monetary policiesunder Trump instead of Harris are political or righteous, traders universallyexpected a tighter Fed.

So that huge US dollarbear rally accelerated after Trump won, the USDX blasting up another 3.9% to107.5 over the next several weeks!  Thatextended its total gains since late September to 7.1%, an enormous move in such a short span for the world’s reserve currency.  The FOMC cut another 25bp at its next meetingtwo days after elections, but that was one of the off meetings not includingFFR projections.

Traders activelyspeculate on and hedge for coming federal-funds-rate moves in futures.  Those imply what markets are expecting theFed to do.  Between the FOMC’s maiden outsizedcut in mid-September to FOMC Eve this week, those cuts collapsed.  The day before the FOMC cut another 25bp for itsthird cut of this cycle, those futures implied traders were alreadyexpecting exactly 50bp of additional cuts in 2025!

Again that was downfrom 100bp next year in the previous dot plot three months earlier.  So rationally if top Fed officials projectedtwo or more 25bp cuts in 2025, markets shouldn’t have reacted much.  That was priced-in, and the USDX hadalready surged sharply on yields staying higher for longer.  On Tuesday the USDX closed at 107.0, whilegold ran $2,644.  Traders universallyexpected the FOMC to prove hawkish.

And it did, but merelyaligned with shifted expectations after Trump’s decisive victory!  Exactly on script, the FOMC again cut its FFRanother 25bp to 4.38%.  That made for100bp of cuts in 2024, exactly what the previous dot plot predicted inmid-September.  The FOMC only made oneminor change to its statement, qualifying “additional adjustments to the targetrange” with considering “the extent and timing of” more cuts.

The Fed chair wasexpected to come across as more hawkish in his usual post-decision presser, andhe did.  I watched it live as always, and exactly as expected Jerome Powell’s opening statement declared morerestraint on further cuts.  Right upfronthe warned, “With today’s action, we have lowered our policy rate by a fullpercentage point from its peak, and our policy stance is now significantly lessrestrictive.”

“We can therefore bemore cautious as we consider further adjustments to our policy rate.  We know that reducing policy restraint toofast or too much could hinder progress on inflation. ... If the economy remainsstrong and inflation does not continue to move sustainably toward two percent,we can dial back policy restraint more slowly.” Importantly those press conferences start a half-hour after FOMCdecisions.

Powell’s expectedhawkishness wasn’t what fueled those violent market reactions, as they immediatelyignited on that FOMC decision.  Andwith that expected quarter-point cut and the FOMC statement barely changed fromthe prior meeting’s, the quarterly Summary of Economic Projections’ dot plothad to be the culprit.  It is released atthe same time as FOMC decisions, 30 minutes before Powell takes the podium.

Back in mid-September,top Fed officials had projected the federal-funds rate being 3.38% exiting2025.  This week they raised that 50bp to3.88%, exactly as futures were pricing in the day before!  The 100bp of cuts forecast next year threemonths ago were lopped in half to 50bp.  Againthe USDX already soared for much of that intervening span, on expectations for fewerFed rate cuts under Trump leaving higher yields.

So it was shocking tosee the US Dollar Index immediately soar on that dot plot, closing up ahuge-for-it 1.0% to 108.1!  That was thebiggest USDX up day by far since the day after elections when Trump’s big winwas already fully apparent.  And it leftthis leading dollar benchmark at a 25.3-month high.  How in the heck were currency traders surprisedby the FOMC doing exactly what they had expected and priced in?

After decades ofanalyzing every FOMC decision, I have no idea what traders were thinking thisweek.  Top Fed officials did up their PCEinflation forecasts for 2025 by 0.4% on a headline basis and 0.3% core, both to2.5%.  Maybe the currency guys figured ahotter inflation forecast implied even fewer than two total cuts next yearacross eight FOMC meetings.  Maybe theyworried the “Longer run” FFR edged up 0.1% to 3.0%.

The ironic thing isspeculators sophisticated enough to trade super-leveraged currency futuresshould know the dot plot is notoriously inaccurate in predicting wherethe FFR will actually go!  The Fed chairhimself often warns about this in his post-FOMC-meeting press conferences.  Examples are legion, as top Fed officialsconstantly change their outlooks based on the latest trends in jobs andinflation data.

The dollar inexplicablyrocketing higher Wednesday unleashed intense gold-futures selling.  Leverage in gold futures is extreme, andspeculators in that hyper-risky arena look to the dollar’s fortunes for theirprimary trading cues.  They are quick todump gold futures when the dollar surges dramatically, which slams gold sharplylower.  Wednesday’s gold plunge was thelatest in many after FOMC hawkish surprises.

This week each100-ounce gold-futures contract controlling $264,410 worth of gold on FOMC Eveonly required traders maintain $11,500 cash margins in their accounts.  That made for extreme maximum leverage of23.0x!  At those levels, a mere 4.3% goldmove against specs’ bets would wipe out 100% of their capital risked.  At 23x leverage, every dollar traded in goldfutures also has 23x the price impact on gold.

So the USDX’sblistering rally after this latest FOMC decision unleashed big gold-futuresselling, which slammed gold 1.9% lower on close to $2,593.  Bearish psychology really flared, as seen ingold’s effective sentiment gauges of silver and the GDX gold-stock ETF.  They plummeted 3.3% and 4.6% that day, thelatter to a new post-election low!  Ithought gold’s 1.9% drop on that hawkish FOMC surprise was resilient.

The day after theelections, gold plummeted 3.0% as the USDX rocketed up 1.6%!  Then the subsequent Monday, gold plungedanother 2.3%.  A couple weeks later, goldsuffered a second huge 3.0% down day.  So1.9% isn’t even really big in recent context! And while that apparent hawkish Fed surprise tested gold’s monsterupleg, it is nowhere near being in jeopardy as readily evident in anylonger-term chart.

As humans, we tradersare inherently-emotional.  Our greed andfear runs wild on outsized daily moves, which we psychologically weight muchmore highly than they ought to be.  Thebest antidote for fighting those dangerous emotions which lead to buying high thenselling low is perspective.  A1.9% gold drop sure feels bad in real-time, but it’s barely noticeable whenproperly framed within its broader context.

This chart looks atgold superimposed over speculators’ gold-futures positioning over the lastseveral years.  Gold is rendered in blueon the right axis, while total spec longs and shorts are shown in green and redon the left.  Gold has provenremarkably resilient since the elections, consolidating high keeping its monster upleg alive and well!  So far gold has passed this latesthawkish-Fed test with flying colors.

Despite gold plunging1.9% to $2,593 Wednesday, it remained well above that pullback low of $2,562 inmid-November.  And again that totalselloff clocked in at 8.0%, yet uplegs don’t end until selloffs exceed 10%entering formal correction territory.  Soeven if gold-futures momentum selling in the Fed’s wake manages to force goldto a fresh pullback low, gold’s monster upleg remains intact anywhere northof $2,507.

That’s another 3.3%under mid-week post-FOMC levels, quite a ways lower considering fewer Fed ratecuts next year have already spent several months being priced in.  As long as gold is merely pulling back andconsolidating high, traders need to stay bullish on it.  Gold’s 1.9% plunge this week actually makesits near-term outlook considerably more bullish.  The main reason is big gold-futures sellinghad to fuel it.

Back in late Septembertotal spec longs surged to 441.0k contracts, a 4.6-year high and their fifth-highestlevels ever witnessed!  I warnedabout that at the time, in a contrarian essay on gold’s high selloff risk that drew a lot of flak.  But there havebeen big gold-futures long liquidations since, driving gold’s pullback.  By late November total spec longs had plungedto 350.0k, just 52% up into their monster-gold-upleg trading range!

Gold-futurespositioning data is only released weekly, current to Tuesday closes.  And that isn’t reported until late Fridayafternoons.  So the latest-availablenumbers when this essay was published are as of December 10th.  Then total spec longs were 370.8k contracts,or 63% up into that same trading range. With the likely-frenzied gold-futures selling necessary to slam goldmid-week, they are likely much lower now.

Typically massive golddown days on the order of 2% to 3% require 20k+ contracts of spec longdumping.  So total spec longs couldeasily have made a new post-election low following Wednesday’s hawkish Fedsurprise.  The lower they go, the morebullish the near-term outlook for gold since specs have more room and capitalfirepower to buy back in.  Recent months’excessive spec longs have already really moderated.

Gold also soared toextremely-overbought levels in late October before this necessary and healthypullback got underway, which was a week before the elections.  Back then gold was stretched way up to 1.183xits 200-day moving average, dangerous rarefied levels I warned about in thatgold-selloff-risk-high essay. Wednesday’s post-Fed plunge bashed that same metric back down to just1.054x, not overvalued at all.

Quarter-to-dateincluding that latest 1.9% gold drop, the yellow metal is still averaging adazzling record $2,667!  That trouncesthe previous record of $2,477 in Q3’24, and is tracking for an enormous 35%year-over-year jump from Q4’23.  HawkishFed surprise or not, gold is consolidating high way up in amazing recordterritory.  A year ago this week,gold was trading at $2,020 and had never even exceeded $2,071.

So despite the wailingand gnashing of teeth in gold-world after the FOMC, gold is still faring greatif not fantastic!  Gold has been brieflywhacked immediately after many FOMC decisions in recent decades that sparked astronger dollar.  This latest powerfulUSDX bear rally was already way-overextended and really-overbought before theFed, and is even worse now.  It is overdueto roll over unleashing gold-futures buying.

Gold’s outlook andfundamentals remain really bullish, as I analyzed a couple weeks ago in that monster-upleg-alive-and-well essay.  And the fundamentally-superiorsmaller-gold-miner stocks arebig bargains today as explained in last week’s essay.  Over the past six reported quarters, the GDXJ-top-25 mid-tiers andjuniors have seen their sector unit profits utterly skyrocket 34%, 106%,126%, 63%, 66%, and 71% YoY! 

And they are almostcertain to double again from Q3’24 levels in this current almost-overQ4!  So let not your heart be troubled ifyou own gold stocks or want to add allocations before they inevitably meanrevert far higher to reflect these awesome prevailing gold prices.  The battered gold stocks need to outperformtheir metal massively for a long time to reflect reasonable multiples of theirunderlying colossal record profits.

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The bottom line is gold is passing this latesthawkish-Fed-surprise test with flying colors. Inexplicably the US dollar soared despite the FOMC meeting all keyexpectations, including total 2025 cuts being slashed in half.  That unleashed big gold-futures selling,slamming gold.  Yet that down day wasn’thuge by recent standards, gold remained well above mid-November’s pullback low,and its monster upleg is alive and well.

Uplegs don’t give up their ghosts without correction-gradeselloffs, and gold has been nowhere near suffering one.  Yet this healthy pullback has made greatprogress, normalizing speculators’ gold-futures positioning and eradicatingextreme overboughtness.  That leaves goldnicely set up to resume powering higher as the overextended US dollar inevitablyrolls over.  Gold stocks have massivecatch-up rallying to do.

Adam Hamilton, CPA

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