Gold Buying Only Starting / Commodities / Gold & Silver 2023

Gold has powered highersmartly over the past couple months, achieving big gains.  But this gold buying is only starting,implying this young upleg still has a long way to run yet.  Speculators’ gold-futures buying remainsmodest, while much-larger identifiable investment buying hasn’t even begun.  Traders will have to increasingly chase gold’supside momentum to restore normal portfolio allocations, really amplifying itsgains.

Gold has been on a tearlately, blasting higher to major technical breakouts.  Between late September to midweek, the yellowmetal surged up 15.7% in 3.5 months! Nearly all those big gains accrued since early November alone, when goldcarved a deep double-bottom.  During thisyoung upleg’s rapid ascent, gold shattered its downtrend resistance and 200-daymoving average.  Now it is flashing a potentbuy signal.

A powerful Golden Crossis occurring in gold, with its 50dma crossing back above its 200dma from below!  This is one of the most-effective and most-bullishindicators in all of technical analysis, arguing this young gold upleg is onlygetting started.  More importantly, gold’ssupply-and-demand fundamentals align with and corroborate this rosy outlook.  Impressively the great majority of usualgold-upleg-driving buying remains!

Major gold uplegs arefueled by three progressively-largerstages, with the latter two ignited by preceding ones.  Uplegs are born and initially driven bygold-futures speculators buying to cover short-side trades.  That soon gives way to bigger specgold-futures long buying, which really accelerates gold’s gains.  They ultimately grow big enough to enticeinvestors to return with their vast pools of capital, supercharging golduplegs.

This specimen’s initialstage-one gold-futures-short-covering buying is about 3/4ths exhausted, whichis what has driven gold higher so far. But the subsequent stage-two gold-futures long buying is likely onlyabout 1/6th expended.  And theall-important stage-three gold investment demand remains nonexistent in identifiableform in its primary indicator.  All thisargues the lion’s share of gold’s gains are still coming!

The gold-futuresspeculators control the first two stages because of the extreme leverageinherent in that realm.  That enables theircapital to punch way above its weight in terms of gold-price impact.  Midweek, each 100-ounce gold-futures contractcontrolled $187,760 worth of gold.  Yettraders were only required to keep $6,900 cash margins in their accounts percontract, allowing crazy maximum leverage of 27.2x!

That dwarfs the stockmarkets’ legal limit of 2x that has been in place since 1974.  At 27x, every dollar of capital deployed ingold futures exerts 27x the influence on gold prices of a dollarinvested outright!  So this gold-futurestrading utterly dominates gold’s short-term price action, especially wheninvestors aren’t active.  That has certainlybeen the case in recent months, with futures doing all of gold’s heavy lifting.

Unfortunatelyspeculators’ collective gold-futures trading activity is only available weeklywith a lag.  It is current to Tuesdaycloses, but not published until late Friday afternoons in the famousCommitments of Traders reports.  So thelatest-available CoT data before this essay was published was merely current toJanuary 3rd.  Gold surged another 2.0% inthe subsequent CoT week, so this buying is understated some.

This chart superimposesgold and its key technicals over specs’ total longs in green and shorts in red.  It is current to Wednesday’s close, the datacutoff for this essay.  While gold’sgolden-cross buy signal had not quite flashed midweek, it is on track totrigger Friday after this essay’s release. Gold is powering higher with a vengeance, mean reverting strongly after mid-2022’ssharp selloff on anomalous events.

Between early March tolate September last year, gold crumbled 20.9% in 6.6 months technically enteringa bear market.  But starting from an unsustainablegeopolitical spike after Russia invaded Ukraine, gold’s selloff wasoverstated.  Gold initially recoveredfrom that into mid-April, when extreme anomalies sparked snowballing selling.  That accounted for nearly 5/6ths of gold’s totalmid-2022 selloff, the overwhelming majority.

The Fed embarked on its most-extreme hawkish pivot ever, launching the US dollar stratospheric. Top Fed officials aggressively hiked their benchmark federal-funds rate anastounding 425 basis points out of a zero-interest-rate policy in just 9.0months!  They simultaneously rampedquantitative-tightening bond selling to its highest levels ever dared by far at$95b per month!  Such epic tightening wasradically unprecedented.

The Fed panicked tofight the raging inflation unleashed by its own extreme money printing.  In just 25.5 months into mid-April 2022, theFed had recklessly ballooned its balance sheet by an absurd $4,807b or 115.6%!  That effectively more than doubled themonetary base underlying the global US dollar supply in just a coupleyears.  Relatively-way-more money wascompeting for relatively-less goods and services.

That grotesque monetaryexcess bid prices sharply higher, heavily debasing the US dollar’s purchasingpower.  But the US Dollar Index still startedsoaring, on the massive yield differentials the Fed’s hikes were opening upover other major currencies.  Frommid-April to late September, the USDX skyrocketed an astounding 14.3% to anextreme 20.4-year secular high!  That loosedenormous gold-futures selling.

Those gold-futures speculatorslook to the US dollar’s fortunes for their primary trading cue, affirming thatgold remains money.  They do the oppositewhen the dollar makes material moves, selling futures when it is rallying.  Their trading time horizons are compressed incrediblymyopically due to that extreme leverage they run.  Way up at that crazy 27x, a mere 3.7% adversegold move wipes out 100% of their capital risked!

So over gold’s entiremid-2022-selloff span, speculators dumped 165.5k gold-futures long contractswhile adding 66.0k short ones.  That huge231.5k contracts of total selling was the equivalent of a colossal 720.0 metrictons of gold!  That was far too much toofast for markets to absorb, pummeling gold prices sharply lower.  But gold-futures speculators’ capitalfirepower is quite finite, so their selling soon ran out of steam.

Gold finally bottomedat $1,623 on September 26th, literally stock-panic-grade levels.  That was a deep and brutal 2.5-year low notseen since just emerging from March 2020’s pandemic-lockdown stock panic!  In order to hammer gold that hard, specs’ totallongs plunged to a 3.4-year low while their shorts soared to a 3.8-year high!  Such extremes are never sustainable for long,guaranteeing big mean-reversion buying.

I analyzed that gold-futures puking stalling in mid-October while gold still languished at $1,644.  Back then while gold sentiment remained super-bearish,I concluded “speculators’ extreme gold-futures puking over this past half-year isstalling.  That heavy selling responsiblefor these anomalously-low gold prices has exhausted these hyper-leveragedtraders’ capital firepower. ... That guarantees big buying is coming.”

That indeed soonignited in fast stage-one short-covering buying, triggered by the wildly-overboughtUS Dollar Index finally starting to roll over. When gold has just plunged to deep lows scaring the heck out of long-sidetraders, the short gold-futures specs are often the only buyers.  With probabilities mounting for a goldV-bounce, they buy to cover and close their downside bets at fat profits whichcatapults gold sharply higher.

But that wasn’t enoughto convince the crazy-bearish long-side specs, who continued selling down theiroverall positioning to a marginal new 3.6-year low in late November.  So this young gold upleg suffered that doublebottom.  But with the USDX’s own overduemean reversion lower really gathering steam, that gold-futures short covering resumed.  As of that latest CoT data current to January3rd, it hit 66.5k contracts.

That is the dominantdriver of gold’s 15.7% surge, as spec long buying remained anemic at merely 18.1kcontracts.  Together that adds up to 84.5kcontracts of total reported gold-futures buying in gold’s young upleg so far, theequivalent of 262.8t of gold.  But thatis still less than 3/8ths of the massive gold-futures selling that pummeledgold lower in mid-2022.  That implies over5/8ths of likely gold-futures buying remains!

While total spec shortshave already collapsed back down near their rising secular support line, totalspec longs remain far below recent years’ resistance around 413k contracts.  In order to climb back up to those levelswhich flagged the major gold peaks since 2020, specs would have to buyanother 139.9k longs or 435.1t of gold! That kind of stage-two buying would catapult gold way higher, really growingthis young upleg.

Since speculators’ gold-futurestrading often dominates gold price trends, I analyze the latest CoTs in all ourweekly and monthly subscription newsletters. In order to quickly convey specs’ overall positioning in gold futures andits near-term implications for gold prices, I developed an indicator.  It simply looks at specs’ total longs andshorts as percentages of their past-year trading ranges, revealing howfar up in they are.

As of that latest-availableJanuary 3rd CoT when this essay was published, spec longs were 17% up into theirrange while spec shorts were 24% up into their own.  That implied 3/4ths of likely stage-one short-coveringbuying had been expended, but fully 5/6ths of stage-two long-side buyingremained!  The most-bullish setup forgold is 0% longs and 100% shorts, which shows specs have largely exhaustedtheir selling.

But because spec longs reallyoutnumber shorts, they are proportionally more important for gold’s near-termdirection.  On average over the past 52reported CoT weeks, spec longs ran 2.5x higher than spec shorts.  So total spec longs being just 17% up intotheir past-year trading range is much more significant for gold than spec shortsbeing 24% up into theirs.  The greatmajority of stage-two long buying is still coming!

With way less gold-futuresshorts, stage-one short-covering buying tends to run out of steam within a fewmonths.  And that short covering ismandatory, as specs are legally required to buy contracts to offset and closetheir downside bets.  But that frenziedshort covering drives gold high enough for long enough to trigger stage-two longbuying.  That generally lasts three tosix months as speculators chase gold’s upside.

Again combining longsand shorts, something on the order of 3/8ths of specs’ likely gold-futuresbuying has passed.  With over 5/8thsstill coming, gold has good potential to double the 15.7% gains thisyoung upleg has already enjoyed!  Thatought to prove enough gold upside momentum to start enticing investors toreturn.  While they don’t run extremeleverage like the futures guys, they control vastly more capital.

So their stage-threebuying is necessary to fuel the biggest gold uplegs, which can exceed 40%gains.  Two such mighty gold uplegs drivenby massive investment buying crested in 2020, at mighty 42.7% and 40.0%gains!  Unfortunately global gold investmentdemand is much harder to track than specs’ futures buying, as it is onlyreported quarterly in the World Gold Council’s excellent Gold Demand Trends’reports.

But the combined gold-bullionholdings of the dominant American GLD SPDR Gold Shares and IAU iShares GoldTrust gold ETFs offer a great high-resolution proxy for overall goldinvestment demand.  Reported daily, they reflectAmerican stock-market capital deployed in gold via these mighty ETFs.  Considered over quarters, their holdingsclosely track and sometimes dominate the WGC’s global-gold-investment trends.

This chart superimposesGLD+IAU holdings over gold and its key technicals in recent years.  Just like the previous gold-futures chart, buyingand selling over gold’s uplegs and corrections is noted.  But unlike the gold-futures speculators, Americanstock investors haven’t even started buying gold yet.  Its young upleg hasn’t run high enough forlong enough to convince them to return, so all their stage-three buying isstill coming.

Gold-futuresspeculators’ dominance of gold price action extends beyond their extreme leverage,since the resulting gold-futures price is gold’s global reference one.  That’s what all traders watch, including investors.  So when heavy gold-futures selling bulliesgold lower like in mid-2022, that gold weakness really taints investorpsychology.  Thus they joined in the heavygold selling last year, even though it was irrational.

Gold again plunged17.9% mostly on big gold-futures selling between mid-April to late September.  The futures specs fled as the US dollar shotparabolic on extreme Fed tightening.  Butduring those six calendar months, headline US Consumer Price Index inflationaveraged blistering 8.5% year-over-year surges! That raging inflation proved the hottest seen by far since the lastinflation super-spikes during the 1970s.

Gold skyrocketed during those even in conservative monthly-average-price terms, nearly tripling during the firstbefore more than quadrupling through the second!  Gold investment demand exploded as that hotinflation relentlessly eroded the US dollar’s purchasing power.  While today’s third inflation super-spike ofthis modern monetary era will ultimately fuel massive gold demand, mid-2022’sextreme anomaly delayed that.

Instead of focusing ongold’s super-bullish fundamentals and staying the course, investors frettedabout its plunging futures-driven prices. So they fled last year as gold was hammered lower, as was evident in GLD+IAUholdings.  Between late April to earlyDecember, they collapsed 16.7% or 271.3 metric tons.  Naturally investors fleeing from gold’sdownside momentum exacerbated it, amplifying the overall selloff.

Since investors owngold outright, they have no need to be as high-strung reacting to price movesas those hyper-leveraged gold-futures speculators.  So toppings and bottomings in gold-ETFholdings lag those in gold itself. It takes some time after major peaks and troughs in gold to convince investorstrend changes are underway.  During gold’sactual precise 20.9% selloff last year, GLD+IAU holdings fell 9.0% or 140.9t.

Despite gold blasting15.7% higher since late September, investors apparently haven’t been impressed.  At best in late December, GLD+IAU holdingshad merely recovered a tiny 0.9% or 12.8t off their deep 2.7-year low a fewweeks earlier.  That was also stock-panic-grade,American stock investors hadn’t owned less gold via their preferred trading vehiclessince the dark heart of March 2020’s panic! Talk about irrational.

Because of an unsustainablegold-futures-driven anomaly, investors effectively abandoned gold during thebiggest inflation super-spike since the 1970s. Frightened away by gold’s big mid-2022 selloff, their herd psychology waxedso bearish that they still haven’t started returning.  The big stage-three gold buying that fueledthose mighty uplegs peaking in 2020 hasn’t even started yet per GLD+IAUholdings!

American stockinvestors effectively have zero portfolio allocations in gold today,which is crazy given this backdrop.  Not onlyis an inflation super-spike underway, but the Fed’s frantic reaction has forcedstock markets into a deepeningbear market.  Yet exiting December, allthe gold held by GLD and IAU was still only worth 0.2% of the market capitalizationof the elite S&P 500 stocks! Investors have vast buying to do.

Just to mean revert GLD+IAUholdings back up to mid-April-2022 levels before that Fed-goosed-dollar anomaly,GLD and IAU shares would have to see enough differential buying to catapult theirholdings 19.3% or 262.6t higher.  That’s gettinginto big-gold-upleg territory, as GLD+IAU holdings soared 314.2t and 460.5tfueling 2020’s massive 42.7% and 40.0% gold uplegs.  And that was with low and benign inflation!

With inflation nowraging and stock markets burning, the ultimate stage-three investment buying inthis gold upleg ought to prove much bigger. Just to return to October 2020’s record GLD+IAU holdings high of1,800.5t which seems conservative in this super-bullish environment for gold, another437.3t would have to be added.  It wouldn’tsurprise me to see double or triple that with this inflation super-spikeraging.

So this young gold upleg’sstage-one gold-futures short-covering buying is about 3/4ths exhausted, with aquarter still left to go.  Themuch-larger stage-two gold-futures long buying is only about 1/6th complete sofar, with the lion’s share remaining. And the vastly-bigger stage-three investment buying hasn’t even startedyet according to gold investment demand’s best daily indicator.  All that is wildly bullish for gold prices!

The biggestbeneficiaries will be its miners’ stocks, which really amplify gold’s gains dueto their earnings leverage to its prices. As of midweek, the leading GDX gold-stock ETF has blasted 45.6% higherat best during gold’s parallel 15.7% upleg. That makes for good 2.9x upside leverage to gold, on the high side ofGDX’s usual 2x-to-3x range.  The biggergold’s upleg grows, the more these gold-stock gains will accelerate.

But GDX is dominated by large major gold miners,which aren’t as responsive to gold as smaller mid-tier and junior miners.  The fundamentally-superior ones enjoy much-largergold-upleg gains, and the trading books of our newsletters are currently fullof them added at fire-sale prices surrounding gold’s bottoming.  They are already starting to soar with gold,with big unrealized gains in a gold-stock upleg likely togrow huge.

If you regularly enjoy myessays, please support our hard work!  Fordecades we’ve published popular weekly and monthly newslettersfocused on contrarian speculation and investment.  These essays wouldn’t exist without that revenue.  Our newsletters draw on my vast experience,knowledge, wisdom, and ongoing research to explain what’s going on in the markets,why, and how to trade them with specific stocks.

That holistic integratedcontrarian approach has proven very successful, yielding massive realizedgains during gold uplegs like this underway next major one.  We extensively research gold and silver minersto find cheap fundamentally-superior mid-tiers and juniors with outsized upsidepotential as gold powers higher.  Our tradingbooks are full of them already starting to soar.  Subscribetoday and get smarter and richer!

The bottom line is therecent gold buying is only starting. Gold’s young upleg has so far mostly been fueled by stage-one gold-futuresshort covering, which still isn’t finished. The great majority of bigger stage-two gold-futures long buying is stillcoming.  That will eventually drive goldhigh enough for long enough to convince investors to return with their vaststage-three buying, growing this gold upleg into the big leagues.

And it should prove amonster with inflation raging out of control in its first super-spike since the1970s, which will supercharge gold investment demand again.  During times of serious currency debasement,all investors need sizable gold portfolio allocations.  That will require massive buying startingfrom virtually nothing.  The gold miners’stocks will amplify gold’s resulting gains like usual, earning fortunes fortraders.

Adam Hamilton, CPA

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