Gold Price Momentum Selloff / Commodities / Gold and Silver 2021

Gold has suffered unrelentingselling in the last couple months, hammering it and its miners’ stocks muchlower.  Those outsized anomalous losseshave left sentiment in tatters, with overpowering bearishness universal.  Gold’s thrashing had nothing to do withfundamentals, it was driven by cascading momentum selling in gold futures andgold-ETF shares.  But such dumping isfinite, increasingly likely to exhaust itself.

Last summer, goldrocketed 40.0% higher out of last March’s COVID-19-lockdown-spawned stockpanic.  That massive upleg left thismetal extraordinarily overbought, guaranteeing a correction to rebalanceboth sentiment and technicals.  That cameright on schedule, with gold dropping 13.9% over 3.8 months into the end ofNovember.  That healthy selloff was inline with this bull’s precedent, leaving gold sufficiently oversold.

Gold’s three priorcorrections during this secular bull had averaged 14.3% losses over 4.1 months.  And that was skewed big, with two of those earlierselloffs seriously exacerbated by unique anomalous events.  So the odds swung around to favor gold’s nextbull upleg getting underway.  Indeed it soonstarted marching higher in a strong uptrend, carrying gold up 9.8% by early January.  Then gold went pear-shaped!

On Friday January 8th,gold was blitzed with extreme gold-futures selling.  That shattered its uptrend, blasting gold 3.5%lower that day alone!  That was pure technical selling, whichaccelerated after gold’s psychologically-heavy $1,900 level failedovernight.  From there it has been alldownhill, with gold falling 12.0% by the middle of this week.  That extended its total correction to 16.8%, challengingthe worst of this bull.

What the heckhappened?  Gold investment demand shouldbe strong if not massive given today’s super-bullish backdrop.  The Fed’s printing presses are spinning likecrazy, with it monetizing a colossal $120b per month of US Treasuriesand mortgage-backed securities.  Over thepast year, the Fed’s total balance sheet and Treasuries held have skyrocketed anabsurd 82.5% and 95.8% to a mind-blowing $7,590b and $4,845b!

This most-extrememonetary inflation in US history is happening with US stock markets tradingway up at dangerous bubble valuations. Exiting February, the elite S&P 500 stocks averaged extreme trailing-twelve-monthprice-to-earnings ratios of 35.8x! Investors should be rushing to diversify their stock-heavy portfolios ingold, especially as rising yields threaten to slay stocks’ There-Is-No-Alternativerationalization.

The relentless andsometimes-heavy gold selling since early January had nothing to do with gold’sstrong fundamentals.  Instead it was purelymomentum-driven, snowballing gold-futures selling that triggered acascading exodus from major-gold-ETF shares. The lower gold fell, the more these traders either had to or wanted tosell.  Then their ongoing dumping exacerbatedgold’s losses, forming a powerful vicious circle.

While tough to weatherpsychologically, this type of mindless herd momentum selling is inherentlyself-limiting.  At some point, everyonesusceptible to being scared into selling low has already sold, leaving onlybuyers.  Then gold rallies sharply fromthe selloff nadir, resuming its next bull-market upleg.  The past couple months’ selloff wastwo-staged, a gold-futures primary igniting a far-bigger gold-ETF secondary.

Unfortunately andinfuriatingly at times, gold-futures speculators punch way above their weightswhen it comes to the gold-price impact of their trading.  The extreme leverage inherent in gold futuresgives these guys outsized influence over gold prices.  Back in early January before this selling avalanchestarted, the gold-futures margin requirements mandated just $10,000 cash held inaccounts for each contract traded.

As gold was still up near$1,915 then, that meant each 100-ounce contract controlled $191,500 worth ofgold.  That enabled gold-futuresspeculators to run extreme leverage as high as 19.2x!  For decades the legal limit in the stock marketshas been 2x.  For every 1% gold’s pricemoved, these specs would gain or lose 19%. Such an intense amplification of risks greatly compresses the timehorizons for their trades.

On that early-JanuaryFriday when $1,900 gold failed, gold’s 3.5% plummeting leveraged 19x forcedbrutal 2/3rds losses on traders long at maximum margins!  Running extreme leverage, they are forced tosell or face imminent ruin when gold is falling.  Their focus is exceedingly-myopic bynecessity, making buy-and-sell trading decisions exclusively on momentum.  Speculators’ herd futures dumping kicked offgold’s selloff.

This first chart superimposesgold over specs’ total gold-futures long and short contracts held.  These are reported weekly in the famousCommitments of Traders reports.  Had thesnowballing gold-futures selling by these hyper-leveraged traders not flared,gold would likely be back over $2,000 by now. But because of the extreme risks inherent in amplifying gold’s priceaction, heavy gold-futures selling often cascades.

While gold-futuresspeculators wield excessive influence over gold prices, the capital they commandis limited.  So though they can dominateshort-term price action, that usually doesn’t last very long.  Both their total gold-futures longs andshorts have meandered in giant ranges during this secular gold bull, which arerendered here.  Usually heavygold-futures selling is a primary driver of gold’s healthy bullcorrections.

But surprisingly that didn’treally happen during gold’s initial correction running from early August tolate November.  While the metal fell13.9% in line with bull precedent, total spec longs merely edged down 3.6kcontracts while total spec shorts actually fell 12.0k.  As long buying and short-covering buying haveidentical gold-price impacts, that netted to 8.5k contracts of buying equivalentto 26.4 metric tons of gold.

That unusual tradingsuggests gold-futures speculators remained bullish on gold during the earlymonths of its latest correction.  Theywanted to stay exposed to gold upside with long contracts, and theirappetite for short selling this strong metal waned.  That is normal over the course of secularbulls.  The more years gold powers higheron balance, the more bullish traders grow increasingly expecting gains topersist indefinitely.

So specs’ totalgold-futures longs have carved a rising support line in recent years,generally remaining above it.  And theirshorts have gradually drifted lower forming an overhead resistance line.  If those held, that implied the risks of cascadinggold-futures selling were fairly modest after gold’s original bottoming at theend of November.  That proved true untilgold’s brutal 3.5% plummeting on markets’ first Friday of 2021.

Unfortunately theweekly CoT reports are low-resolution data, masking what happens withinweeks.  The CoTs are current to Tuesdaycloses, but aren’t released until late Friday afternoons.  During that CoT week straddling gold’sinitial plunge, specs dumped an enormous 35.7k gold-futures long contracts!  Anything over 20k in a single CoT week ishuge, and that ranked as the 20th-largest long liquidation since early1999!

Since that fateful uglygold action on January 8th kicked off gold’s snowballing selloff, it is very importantto understand.  Today it is fashionableto blame gold’s momentum selloff on rising yields, yet that day the benchmark10-year Treasury yields were just 1.11% remaining well under traders’radars.  Gold broke below that $1,900 leveltriggering stop-loss selling in overnight Asian trading, well before theUS session.

Gold was already down1.5% heading into that Jobs Friday, and that monthly US jobs report wasactually gold-bullish.  It came in at a majormiss with total US jobs falling 140k in December on new lockdowns, which wasway worse than the already-poor +50k estimates. Gold rallied after that weak data implied the Fed would have to up itseasing.  3/7ths of that 3.5% gold plungehappened overnight before that jobs data.

There was no fundamentalreason at all to dump gold that day.  Butfor gold-futures speculators running extreme 19x leverage, they had to flee orrisk annihilation.  Suffering 2/3rds ofyour capital wiped out in a matter of hours is a crazy risk no one can affordto take.  The more traders amplify theirgains and losses with leverage, the shorter-term their focuses are forced tobecome.  They simply have to sell whenothers do.

With that unsustainably-extremegold-futures selling quickly exhausting itself, gold stabilized and drifted sidewaysfor a few weeks.  But that gold-futures-drivengold plummeting had spooked a far-larger group of traders.  These are American stock traders, bothspeculators and investors, who gain gold portfolio exposure through trading itsmajor exchange-traded funds.  Theircapital dwarfs that of gold-futures specs.

Despite running noleverage up to the stock-market limit of 2x, the gold-ETF shareholders are also often momentum traders.  They loveto pile in to chase gains when gold is rallying, then sell out to flee whengold is falling.  That means speculators’gold-futures trading can become the tail wagging the much-larger gold-investmentdog.  When frantic gold-futures selling crushesgold lower, it can ignite bigger gold-ETF exoduses.

The two dominant gold-exchange-tradedfunds are the venerable GLD SPDR Gold Shares and the smaller IAU iShares GoldTrust.  American stock traders haveshifted some of their vast pools of capital into gold via these vehicles,making them overwhelmingly important for gold price action.  The best global supply-and-demand data forgold is published quarterly by the World Gold Council, showing these ETFs’importance.

In its latest numbersfrom the end of Q4’20, GLD and IAU accounted for a staggering 31.2% and 14.0%of all the gold held in all the world’s physical-gold-bullion-backed gold ETFs!  And the ETF component of global goldinvestment demand has grown into the wildly-swinging wildcard usuallyoverpowering every other gold-demand category quarter to quarter.  Again the WGC’s Q4 data really drives homethis critical point.

As gold’s last uplegsurged into early August’s dazzling all-time-record high, stock traders flockedto gold ETFs to chase those fast gains. So in Q3, ETFs added 272.2t of gold demand globally.  But in Q4 as gold corrected, the momentumcapital flows reversed hard with ETFs suffering a 130.0t draw.  That huge negative 402.1t swing in gold demandquarter-on-quarter via physical ETFs bashed overall demand 116.6t lower!

Gold ETFs act asconduits for the vast pools of stock-market capital to flow into and out ofgold.  When stock traders sell GLD andIAU shares faster than gold itself is being sold, these ETFs’ share prices willdisconnect to gold’s from the downside failing their tracking mission.  GLD’s and IAU’s managers prevent this bybuying back any excess gold-ETF-share supply beyond gold’s own selling on anyparticular day.

These buybacks arefinanced by selling some of the physical gold bullion held in trust forshareholders.  So when gold-ETF holdingsare suffering draws and falling, it reveals stock-market capital flowing backout of gold.  The gold-ETF managers’necessary bullion sales add to selling pressure, exacerbating gold selloffsalready underway.  Like gold-futures selling,gold-ETF-share selling can cascade into vicious circles.

This next chartsuperimposes GLD+IAU physical-gold-bullion holdings in metric tons over thegold price.  Heavy differentialgold-ETF-share selling forcing holdings draws began right after sharp selloffsin gold futures.  Like a thermonuclear bomb,the relatively-small gold-futures selling acts like a fission primary thatignites a much-larger fusion secondary. Gold-futures selling scares gold-ETF shareholders into joining in.

The gold price is highlycorrelated with major-gold-ETF holdings. A colossal 460.5t combined build in GLD and IAU is the only reason goldsoared 40.0% higher last summer in that massive upleg out of those stock-paniclows!  Over that span specs actually solda modest 25.4k gold-futures contracts, netting out to the equivalent of 78.9t ofgold.  American stock traders played a bigrole in gold’s subsequent correction.

When gold fell 13.9%into late November, that was largely driven by GLD+IAU holdings falling 42.2t.  The timing of that differential gold-ETF-shareselling is really important.  Note abovethat after gold peaked American stock traders kept adding gold on balance into mid-October, well after gold’s early-August top.  They didn’t start fleeing until gold-futuresselling forced gold sharply lower in late October and early November.

With gold’s correctionbottoming and a strong young upleg getting underway in December, American stocktraders started returning.  GLD+IAUholdings started rising again on differential buying pressure.  As these shares were bought faster than gold,the ETF managers had to issue new shares to meet that excess demand.  They used the proceeds from those share salesto buy more physical gold bullion to hold.

But that nascent buildin GLD+IAU holdings that would’ve likely accelerated, amplifying gold’s upleg, suddenlydied.  The trigger is crystal-clear inthis chart.  It was gold plummeting 3.5%on January 8th as gold-futures speculators aggressively fled when $1,900failed.  That sharp single-day goldselloff was the event that radically changed sector psychology.  The bearishness flaring then has mostly intensifiedsince.

After that gold plunge,American stock traders shifted from net gold-ETF-share buyers to sellers.  The more GLD and IAU shares they dumped, the weakergold got as those gold-bullion sales added to selling pressure.  The more gold sold off, the more gold-ETFshareholders fled.  Like the parallelgold-futures selling, this was totally momentum-driven.  This intensifying gold-ETF dumping hadnothing to do with fundamentals.

Since January 8th, theFed’s insane money printing hasn’t slowed a bit.  And super-inflationary monetary injections willsurge again when Democrats’ $1.9t of pandemic-stimulus money is soon unleashedinto the US economy.  That vast deluge ofnew money competing to bid up prices on far-slower-growing goods and servicesis going to force price inflation much higher. Gold has always been the ultimate inflation hedge.

Some think bitcoin has usurpedgold in that role, but bitcoin is in a speculative mania today.  In just 5.4 months, it skyrocketed an epic458.4% higher!  Regardless of bitcoin’slong-term prospects, such extreme gains guarantee a post-bubble collapse.  After bitcoin’s last speculative mania climaxingin December 2017, its price crashed 63.6% in just 1.6 months!  Bitcoin is far too volatile for an investmentinflation hedge.

And the stock marketsremain deep into dangerous bubble territory valuation-wise, ripe for a majorselloff any day.  And although 10-yearTreasury yields have soared, even at 1.51% last week real inflation-adjustedyields still remained very negative. The Fed can’t afford to let this suppressed rate normalize, as the addedinterest payments on the US government’s staggering $27.8t of debt would threatento bankrupt it!

The relentless goldselling since early January had no fundamental basis at all.  Given these conditions, gold investmentdemand should’ve surged.  All this goldselling was purely momentum-driven, forming an ugly negative feedback loop.  The more gold-futures and gold-ETF-shareselling, the lower gold’s price was forced. The lower gold fell, the more gold-futures and gold-ETF-share traders weremotivated to flee.

The great majority ofspeculators and investors are not contrarians, but herd-following momentumtraders.  They love to buy high whenprices are rallying strongly, and are easily scared into selling low whenprices are falling.  The latter is the dynamicthat has played out in recent months, fueling that vexing cascading selling inboth gold futures and gold-ETF shares. The good news is that momentum selloffs are self-limiting.

As the tail wagging thelarger gold-investment dog, gold futures are the key.  Speculators can only dump so many longs, andadd so many shorts, before they run out of available capital firepower to keepselling.  The latest-availableCommitments-of-Traders report before this essay was published was current to TuesdayFebruary 23rd.  At that point gold was at$1,806, still way above the capitulation carnage seen since.

Even then, total speclongs had collapsed back down to 339.8k contracts.  They hadn’t been lower since early lastsummer.  Gold was trading at $1,727then in mid-June, on the verge of rocketing 19.4% higher over the next sevenweeks to that last upleg topping of $2,062! Now already well below their climbing bull support line, total speclongs aren’t likely to plunge considerably under today’s probably-well-lowerlevels.

In last March’s stockpanic, gold plummeted 12.1% in just eight trading days.  That forced enormous gold-futures selling asleveraged specs fled in terror.  Thesetraders dumped a colossal 141.8k longs in just seven weeks straddling that!  Their total longs bottomed out and stabilized around 330k contracts.  At somepoint soon, all the specs leveraged enough to be forced out will be gone.  Then gold reverses hard.

Something catalyticwill emerge in the markets, either price action or news.  That will motivate the specs sitting on the sidelinesin cash to flood back into gold futures. As that blasts gold higher, their peers will flood in to chase thatupside momentum.  The resulting goldsurge will motivate stock traders to rush back into gold-ETF shares, amplifyinggold’s gains.  All that self-feeding buyingwill fuel gold’s next bull upleg.

So like all momentum-drivengold selloffs in the past, this one too shall soon pass.  Momentum selling is finite and self-limiting,and soon exhausts itself.  And oncebuying returns reversing that momentum to the upside, gold’s strong fundamentalsshould fuel massive capital inflows.  Betweenthe colossal monetary inflation and super-risky bubble-valued stock markets,all investors should be prudently diversifying into gold.

While gold’s recentbeat-down has been miserable, the collateral damage in gold stocks has been brutal.  The gold miners, which also have very-strong fundamentals,have been bludgeoned back down to deep new lows.  Major gold stocks will leverage gold’s comingupleg by 2x to 3x, with smaller fundamentally-superior ones faring evenbetter.  So we are actively redeployingin great gold-stock trades in our newsletters.

At Zeal we walk thecontrarian walk, buying low when few others are willing before later selling highwhen few others can.  We overcome populargreed and fear by diligently studying market cycles.  We trade on time-tested indicators derived fromtechnical, sentimental, and fundamentalresearch.  That’s why all 1178 stocktrades recommended in our newsletters since 2001 averaged hefty +24.0% annualizedrealized gains!

To multiply your wealthtrading high-potential gold stocks, you need to stay informed about what’s goingon in this sector.  Staying subscribed toour popular and affordable weekly and monthly newsletters isa great way.  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.  Subscribetoday and take advantage of our 20%-off sale!  Deep in a gold-stock correction is the besttime to get deployed.

The bottom line is gold’svexing selloff in recent months was totally momentum-driven.  It had nothing to do with fundamentals, whichremain strong for gold.  Extremegold-futures selling erupted in early January after a key technical level failed,hammering gold lower.  That plummeting scaredAmerican stock traders, who started dumping major-gold-ETF shares.  Both gold-futures and gold-ETF-share sellingcascaded since.

The longer and deepergold’s festering selloff persisted, the more traders were motivated to join theherd selling.  The more they sold, the moregold fell.  The resulting negative feedbackloop has hammered the entire precious-metals complex sharply lower, fuelingsoaring bearishness.  The good news is thegold-futures selling that ignited all this is finite, and is likely nearingexhaustion.  After that, gold shouldrally hard.

Adam Hamilton, CPA

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