Gold Bull Market Breaking Out! / Commodities / Gold & Silver 2019
Gold finally surged tonew bull-market highs this week! Severalyears after its last bull high, gold punched through vexing resistance afterthe Fed continued capitulating on ever normalizing. This huge milestone changes everything forgold and its miners’ stocks, unleashing new-high psychology fuelingself-feeding buying. With speculators notyet all-in and investors wildly underdeployed, gold has room to power muchhigher.
Gold momentum hascertainly been building for a major upside breakout. Back in mid-April with gold still near $1300,I wrote an essay describing the “Gold-Bull Breakout Potential”and why it was finally coming. Then acouple weeks ago with gold in the $1330s, I published another one analyzing “Gold Surges Near Breakout”. For several years higher lows hadslowly compressed gold ever closer to surging over resistance.
Today’s gold bull wasfirst born back in mid-December 2015 the day after the Fed’s initial rate hikein its just-abandoned tighteningcycle. Gold’s maiden upleg wasmassive, rocketing 29.9% higher in just 6.7 months to $1365 in early July 2016! But that first high-water mark has proven impregnableover the 3.0 years since. Gold tried andfailed to break out in 2017, 2018, and 2019, repelled near a $1350 Maginot Line.
While gold mostly climbedon balance, the lack of higher highs really impaired traders’ view onthis asset. New bull highs generateenthusiasm, enticing capital inflows. When prices fail to achieve new bull bests from time to time, traders’interest wanes. Gold was largely forgotten,even though it technically remained in a bull market since there had been no20%+ selloff. Psychology needed new bullhighs decisively over $1365.
While they were inevitablesooner or later here, I sure didn’t expect them this week. June is peak summer doldrums, theweakest time of the year seasonally for gold. And US stock markets remain way up near recent all-time record highs,steeped in euphoria. That has really stunted gold demand inrecent years. So the odds favored gold’slong-overdue bull-market breakout getting pushed later into July or August.
But this metal was defyingweak seasonals to inch inexorably closer. It closed at $1340 on June 7th, $1342 on the 13th, and $1346 thisTuesday the 18th. That was the day beforethe latest Fed decision. The FederalOpen Market Committee had really painted itself into a corner. It had shifted dovish so hard inrecent months that traders’ expectations for a new rate-cut cycle startingseemed impossible to meet.
Had the Fed not been dovishenough, the US dollar would’ve surged unleashing sizable-to-seriousgold-futures selling. But amazingly theFOMC managed to neither cut rates nor tease a rate cut at its next meeting inlate July, yet still convince traders it was ready to cut. That masterful sleight of hand came in the quarterlydot plot, the collective future federal-funds-rate forecasts of top Fed officials. They were dovish.
Back in late Septemberbefore the flagship S&P 500 stock index plunged 19.8% in a severe near-bear correction,the dots predicted 5 more rate hikes including 3 in 2019 and 1 in 2020. After December’s 9th hike of this cycle, themid-December dot plot only moderated to 2 in 2019 and 1 in 2020. In the next dot plot in late March, this year’shikes were struck but 2020’s lone 1 remained. That led into this week’s dot plot.
Traders were expecting almost4 rate cuts over the next year heading into this FOMC decision, which seemedlike a bridge too far. And it was! Top Fed officials’ neutral 2019 outlook of norate hikes stayed unchanged, no cuts were added. I’m surprised the US dollar didn’t surge onthat, indirectly hitting gold. But the dotplot did eliminate 2020’s lone hike and pencil in 2 cuts instead, which was amajor dovish shift.
So improbably in mid-Junewith the S&P 500 just 0.7% off late April’s all-time-record peak, goldcaught a bid. Even before Wednesday’s 2pmrelease of the FOMC statement and dot plot, gold held steady near $1345. When the Fed headlines hit and currency tradersinterpreted them as dollar-bearish and sold, gold shot up to $1354. It gradually climbed from there to challenge $1360by the end of that US trading day.
Gold’s full reactionafter major FOMC decisions often isn’t apparent until the next trading day though,after Asian traders can react. Theirmarkets are closed when the Fed makes its announcements. As Asian markets opened Thursday morningwhich was late evening Wednesday US time, gold rocketed from $1358 to $1385in about an hour! Being a markets junkie,I always check overseas action last thing before bed.
I could hardly believemy eyes that night, and verified gold’s price in multiple trading accounts. This gold bull was breaking out! A decisive breakout is 1%+ beyond an old keylevel. That translated into $1379 off July2016’s seemingly-ancient $1365 bull-to-date peak. If those gains could hold into the US closeon Thursday, a decisive breakout would be confirmed. In early summer with euphoric US stockmarkets no less!
These charts arecurrent to Wednesday’s Fed-Day closes. In order to write and proof these essays on Thursdays to publish on Fridays,Wednesdays are the data cutoff. But as Ipen these words on midday Thursday, gold is still trading at $1385 in USmarkets. This breakout looks like thereal deal, the answer to contrarian investors’ prayers. And speculators’ gold-futures positioningshows room for more buying!
Because of the extremeleverage inherent in gold futures, their traders wield outsized influence over the short-term gold price. At $1350gold, each 100-ounce contract controls $135,000 worth. Yet traders are now only required to hold $3400cash in their account per contract. Thatequates to absurd maximum leverage of 39.7x. Each gold-futures dollar has up to 40x the gold-price impact as adollar invested outright!
This chart superimposesgold in blue over speculators’ total gold-futures positions, with long upsidebets in green and short downside bets in red. Note that while gold has spent several years struggling with that $1350overhead resistance, it has carved major higher lows. That has coiled gold into a giant tighteningascending-triangle technical formation. These patterns are usually resolved with strong upside breakouts.
Speculators’ collectivegold-futures bets are reported weekly late each Friday afternoon, current tothe preceding Tuesday. So the latestdata available when this essay was published was as of June 11th, 6 tradingdays before the Fed’s shift into forecasting rate cuts coming. Gold did rally 1.5% over the nextCommitments-of-Traders-report week ending this Tuesday the 18th, so specs hadto be buying gold futures.
But thislatest-available data still offers some great insights. Total spec longs and shorts were running299.1k and 97.1k gold-futures contracts nearing the FOMC decision. Those shorts were actually at a 14.3-monthlow, leaving big room for aggressive short selling. I was worried heading into this week’s Fed meetingthat it would disappoint by not being dovish enough, igniting a dollar rally triggeringgold-futures shorting.
With shorts so low, therisk of a short-term gold selloff remains high. But high gold prices really stamp out anyzeal traders have for short selling gold futures at extreme leverage. At 39.7x, a mere 2.5% gold rally would wipeout 100% of the capital risked by short sellers! So in the several months following recentyears’ major $1350 breakout attempts, spec shorts stayed low. They didn’t climb until gold started falling.
Major gold uplegs have three stages. They are initially triggered by gold-futuresshort covering which quickly exhausts itself after a couple months or so. Note above that gold’s 15.9% upleg as ofWednesday was largely fueled by a massive 153.7k contracts of shortcovering! That was necessary after specshort selling soared to all-time-recordhighs late last August, forcing gold to the lows which birthed this upleg.
After first-stage shortcovering, the second stage is fueled by gold-futures long buying. So far that has been relatively minor, just41.0k contracts as of the latest CoT data. Again heading into the FOMC, the specs were only long 299.1kcontracts. That is much lower than atpast $1350-breakout attempts, which implies much more room to keep buyingfrom here. This is very bullish for goldunless short selling flares up.
Back in early July 2016when gold rocketed to this bull’s initial $1365 peak, it was fueled by speclongs soaring to 440.4k contracts! Thatwas a whopping 141.3k or 47.2% higher than the latest read. The next major $1350 breakout attempt came inearly September 2017, driven by total spec longs surging way back up to 400.1kcontracts. That too was 101.0k or 33.8%higher than recent levels leading into the Fed.
In late January 2018 thatvexing upper resistance repelled another valiant gold breakout attempt. Total spec longs crested at 356.4k then. That was 57.3k or 19.2% higher than thelatest data. So assuming there wasn’tmassive gold-futures long buying leading into this Tuesday, there’s still room forgold-futures speculators to buy another 57k to 141k contracts! Such big long buying would propel gold wellhigher from here.
But far more bullishthan that is the potential stage-three investment buying. While speculators have the leverage,investors control vastly-larger pools of capital. All the stage-one gold-futures short coveringand stage-two gold-futures long buying is just an ignition mechanism to enticeinvestors to return. Once they do, theirbig capital inflows can ignite strong virtuous circles of buying that persistfor months or even years.
The higher gold climbs,the more investors want to own it. Themore they buy, the higher gold rallies. As investors love chasing winners, nothing drives buying like new highs. New-high psychology is easily themost-powerful motivator fueling big investment buying. And gold investment remains very low eventhis week as gold’s bull-market breakout neared. This is evident in the leading gold ETF’sgold-bullion holdings.
The American GLD SPDRGold Shares dominates the gold-ETF world, acting as the primary conduit forAmerican stock-market capital to flow into and out of gold. I discussed this in depth a couple months agoin another essay on stock euphoriaand gold. As of this Wednesday asgold surged back to $1360 on that Fed capitulation from tightening, GLD held764.1 metric tons of physical gold bullion for its shareholders.
In early July 2016 whengold first hit $1365, GLD’s holdings ran far higher at 981.3t. That was 217.2t or 28.4% higher than thisweek’s levels! At that next major $1350breakout attempt in early September 2017, GLD’s holdings were 836.9t or 9.5% abovetoday’s levels. And at January 2018’s attemptthis key metric for gold investment hit 849.3t, or 11.2% higher than this week. There’s lots of room for investors to buy!
GLD’s holdings haven’treally soared since the first half of 2016 when gold rocketed 29.9% higher inthis bull’s maiden upleg. That was thelast time new bull highs made investors excited about gold. So their potential buying from here ismuch bigger than the GLD holdings near $1350 breakout attempts suggest. The total GLD build in that huge H1’16 goldupleg was 351.1t or 55.7%. Consider thatfrom recent lows.
In early October GLD’sholdings sunk to a deep 2.6-year secular low of 730.2t. That was before the US stock markets started plungingin Q4’s severe near-bear correction, so gold was deeply out of favor with stockeuphoria extreme. A similar total build of350t from there as gold returns to favor among investors would push GLD’sholdings over 1080 metric tons. Thatwould represent a 47.9% total upleg build, not extreme.
And American stockinvestors pouring enough capital into GLD to force it to grow its physical-gold-bullionholdings to 1080t isn’t a stretch. Backin early December 2012 fully 15.6 months after gold’s last secular bull peaked,GLD’s holdings hit their all-time high of 1353.3 metric tons. That’s 77% higher than this week’s levels,proving investors have vast room to shift capital back into gold given theircurrent low allocations.
One way of inferringgold investment is looking at the ratio of the value of GLD’s gold holdings tothe total market capitalization of all 500 elite S&P 500 companies. From 2009 to 2012 that averaged 0.475%, foran implied gold portfolio allocation near 0.5% for American stockinvestors. That’s terrible, as everyinvestor needs a 10% allocation in gold and its miners’ stocks! But 0.5% is still far higher than today’s levels.
When the SPX recentlypeaked at the end of April, this ratio was running around 0.12%. That’s only a quarter of that average fromrecent years before gold fell deeply out of favor. Today investors are so radically underinvested ingold that their portfolio allocations need to quadruple from here to merelyreturn to quasi-normal levels! So there’sroom for great amounts of capital to return to gold, driving it much higher.
Again my data cutoff forthis essay was Wednesday’s close, before gold started breaking out. At that point its gold bull to date was 29.9%higher at best as of several years earlier. The last secular gold bull ran between April 2001 to August 2011. Over that 10.4-year span, gold powered a massive638.2% higher! So gold ultimatelydoubling or tripling from this bull’s birthing low of $1051 certainly isn’t astretch at all.
With this gold bullfinally breaking out after several years of vexing failures, there are dozens ofcharts I’d like to share today. But I’msettling with three so you don’t have to read a book. Again June happens to be gold’s weakest timeof the year seasonally, which gold’s breakout surge is bucking. But despite the wonderful emerging new-highpsychology, gold’s advance isn’t particularly outsized even for summer doldrums.
This chart looks atgold’s average summer performances in all modern bull-market years. Each summer is individually indexed toits final close in May, keeping gold price action perfectly comparable regardlessof prevailing levels. The yellow linesshow 2001 to 2012 and 2016 to 2017. Lastyear’s summer action is rendered in light blue for easier comparison. All these lines are then averaged together intothe red one.
That reveals thecenter-mass drift trend of gold in market summers, which include June, July,and August proper. Gold’s current 2019summer action is superimposed over all that history in dark blue. At least as of gold’s $1360 Wednesday closefollowing the FOMC, it was only up 4.2% summer-to-date. That is still within the typical gold summertrend of 5% from May’s close. Thisgold summer rally is big, but not extreme.
As I continue writingthis essay early Thursday afternoon, gold is trading near $1386. That is up 6.2% since the end of May. In the summer of 2016 the last time gold wasin favor and enjoying that new-high psychology, it rocketed as high as +12.3%summer-to-date by early July. So while earlysummers tend to be weak, gold can still power higher in the right conditions. And a major bull-market breakout is definitelyit!
The main beneficiary ofhigher gold prices is the gold miners. They enjoy big profits leverage to gold as its price rallieshigher. Last week I wrote a whole essayon this “Gold-Stock UplegMounting” where I went into leverage. The leading gold-stock benchmark is the GDX VanEck Vectors Gold Miners ETF. In mid-May I dug into its component goldminers’ latest Q1’19 results,revealing their current fundamentals.
The GDX gold miners’average all-in sustaining costs last quarter were $893 per ounce mined. When compared to Q1’s average gold price near$1300, at $1400 and $1500 gold the major gold miners’ profits would soar 25%and 49% higher! So naturallygold-stock prices are surging with gold’s awesome bull-market breakout thisweek. Here’s the latest chart of gold-stockperformance per GDX as of Wednesday.
Since late 2016 thegold stocks have been trapped in a giant consolidation by gold remaining mostlyout of favor with investors. That manifestedin GDX terms in a major trading range running from $21 lower support to $25upper resistance. On Fed Day as goldrallied to $1360, GDX’s price climbed to $24.00 on close. That was a 16.7-month high for this leadinggold-stock benchmark, and nearing its own breakout.
Early Thursdayafternoon as I pen this essay, GDX has surged again to $25. That’s right at that major resistance line ofrecent years. A decisive breakout fromhere would portend gold stocks finally being off to the races again. And that means enormous gains for contrarianspeculators and investors. Inessentially the first half of 2016 as gold blasted 29.9% higher, GDXskyrocketed 151.2% for huge 5.1x leverage!
As of Wednesday thiscurrent gold-stock upleg per GDX only had 36.6% gains. As gold’s own new-high psychology makes goldstocks alluring again, they should soar dramatically from here. We haven’t seen a real gold-stock upleg inseveral years. Just like gold, when itsminers’ stocks are powering to new highs buying begets buying. Traders love chasing their gains which fuelsa glorious virtuous circle of capital inflows.
For years traders have toldme they were avoiding gold stocks until something big changed. And there is nothing bigger for thishigh-potential sector than new gold-bull highs. All the stars are aligning for big gold-stockgains in the coming months, with their technicals, sentiment, and fundamentalsall looking very bullish. This is not thesummer to check out, but to do your homework and get deployed in great goldstocks.
Unfortunately the majorgold miners dominating GDX are failing to grow theirproduction. That along with theirlarge market caps means smaller mid-tier and junior gold miners with superior fundamentals will enjoy far-better upside as gold climbshigher. While GDX should amplify gold’sgains by 2x to 3x, that will be dwarfed by the epic gains in better smallerminers. Major gold uplegs are agold-stock pickers’ market!
One of my core missionsat Zeal is relentlessly studying the gold-stock world to uncover the stockswith superior fundamentals and upside potential. The trading books in both our popular weekly and monthly newsletters are currentlyfull of these better gold and silver miners. Mostly added in recent months as gold stocks recoveredfrom selloffs, their unrealized gains were already running as high as +108% onWednesday!
If you want to multiplyyour capital in the markets, you have to stay informed. Our newsletters are a great way, easy to readand affordable. They draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in themarkets, why, and how to trade them with specific stocks. As of Q1 we’ve recommended and realized 1089newsletter stock trades since 2001, averaging annualized realized gains of +15.8%! That’s nearly double the long-term stock-marketaverage. Subscribe today and take advantageof our 20%-off summer-doldrums sale!
The bottom line is goldis finally breaking out to new bull-market highs! Somehow the FOMC managed to be dovish enoughin its rate-cut outlook this week to drive US-dollar selling, which unleashed majorgold buying. So gold blasted back overits bull-to-date peak from several years earlier that had oppressed it for solong. Gold hasn’t enjoyed new-highpsychology since then, which is a powerfully-bullish motivating force.
New bull highs bring gold back into the limelight, making it attractive again. Traders love chasing winners to ride theirupside momentum, and buying begets buying. Gold coming back into favor portends much more upside to come, with roomfor big buying by both gold-futures speculators and far-more-importantinvestors. As their capital inflows pushgold to new bull-market heights, the gold stocks are going to soar!Adam Hamilton, CPA
So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm
Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more information.
Thoughts, comments, or flames? Fire away at zelotes@zealllc.com . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!
Copyright 2000 - 2019 Zeal Research ( www.ZealLLC.com )
Zeal_LLC Archive |
© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.