Gold Price Upleg Breaking Out / Commodities / Gold and Silver 2018

Gold’s strong uplegaccelerated this week, powering to major new breakout highs.  Speculators rushed to buy gold futuresfollowing surprising weak-dollar comments from the US Treasury Secretary, whichhit the US dollar hard.  That boostedgold to critical technical levels that should really intensify the shift backto bullish psychology.  This mountinggold breakout confirms gold’s bull market is very much alive and well.

While this week’s surgeput gold on many more traders’ radars, it has actually been picking up steamfor 6 weeks now.  Gold’s latest majorinterim low of $1242 came a couple days before the Fed’s latest rate hike inmid-December.  The gold-futuresspeculators who dominate this metal’s short-term price action have always had adeep and irrational fear of Fed ratehikes.  Historically gold has thrived in rate-hike cycles!

Leading into that fifthrate hike of this current cycle, these hyper-leveraged traders aggressivelydumped longs and ramped shorts at recordlevels.  That battered gold lowerwhile exhausting potential selling.  Soonce the Fed hiked as expected, and didn’t up its 2018 rate-hike forecast fromthe prior quarter’s three more, these excessively-bearish traders startedbuying back in.  This pattern was seenaround past rate hikes.

So two trading daysafter this latest rate hike when gold was still at $1256, I published an essayoutlining why that hike wasso bullish for gold.  It concluded,“…Fed rate hikes are bullish for gold, and this week’sis no exception…  After each pastDecember rate hike which gold-futures speculators sold aggressively into, golddramatically surged in the subsequent months.” And that’s indeed exactly what happened since.

By the final tradingday of 2017 gold had already surged 4.9% out of its pre-rate-hike interimlow.  Those strong gains continued inthis young new year despite these extreme mania stock markets retarding gold investment demand.  Bythis Tuesday, gold’s new upleg extended to an 8.0% gain over nearly 6weeks.  Since the Fed’s rate hike, goldhad rallied on 19 out of 27 trading days. Upleg momentum was already building.

Every January theultra-exclusive World Economic Forum is held in Davos, Switzerland.  It attracts the world’s most powerful people,from CEOs to top political leaders to billionaires.  The financial media flocks to the Swiss Alpsto interview these leading movers and shakers. One of this year’s attendees is Steven Mnuchin, Trump’s TreasurySecretary.  He gave an interview in Davoswhich shocked currency traders.

Mnuchin told reporters,“Obviously a weaker dollar is good for us as it relates to trade andopportunities.”  That’s certainly true,as it’s easier for American companies to export around the world when theirgoods are less expensive due to a lower dollar. But Treasury secretaries have a long tradition of never saying anythingabout the dollar beyond that they “support a strong-dollar policy”.  So Mnuchin’s candor was unexpected.

Mnuchin had madesimilar comments last year that didn’t affect markets as much.  But the combination of this past year’sstrong dollar downtrend and a couple more developments that day triggered bigUS dollar selling.  The US had justslapped tariffs on imported solar panels and washing machines hoursearlier.  Trump’s Commerce SecretaryWilbur Ross spoke alongside Mnuchin at that Davos conference.

Ross warned more trademeasures were coming.  When asked abouttrade wars he replied, “Trade wars are fought every single day...  So a trade war has been in place for quite alittle while, the difference is the US troops are now coming to the rampart.”  There’s no more efficient way to boostexports and execute trade wars than jawboning the local currency lower.  All this together really struck home forcurrency traders.

So the US Dollar Indexplunged 1.0% on Wednesday following those comments, hitting its worst levels in3.1 years.  Incidentally this past year’sdollar weakness shouldn’t have surprised anyone.  Back in late December 2016 when dollareuphoria reigned as the USDX traded at a 14.0-year secular high, I wrote anessay on the unsustainabilityof those extremes.  I warned of “amajor topping underway” before a new bear.

With the USDX failingbelow 90 on those Mnuchin and Ross comments, speculators started flooding intogold futures.  After closing near $1341in US trading Tuesday, gold surged as high as $1352 in overnight action.  Those gains extended in the US on Wednesday,with gold blasting up 1.3% to $1358. That was a very important level technically and psychologically, confirminggold’s forgotten bull market is alive and well.

This chart looks atthis young gold bull superimposed over speculators’ collective positions inboth long and short gold-futures contracts. The Fed’s five rate hikes of this tightening cycle are also highlighted,showing how bullish they’ve proven for gold. This week’s $1358 gold levels are amajor upleg breakout, and right on the verge of being a major bull-marketbreakout.  Investors will certainly takenotice of this.

Gold’s bull was born indespair in December 2015 the day after the Fed’s first rate hike in 9.5years.  The gold-futures speculators hadfreaked out leading into that FOMC meeting, fleeing longs while rushing to addshorts.  That hammered gold to a 6.1-yearsecular low.  Just a few trading daysbefore that hike when gold was despised, I published deep research showing howgold thrived during pastFed-rate-hike cycles.

Futures speculatorswere betting the other way, expecting gold to collapse once the Fed endedZIRP.  It didn’t take them long torealize the error in their ways though, as they quickly started buying to covertheir excessive shorts while flooding into new longs with a vengeance.  So gold soared 29.9% higher over the next 6.7months, well exceeding the +20% new-bull threshold!  That initial bull upleg peaked at $1365 inJuly 2016.

After such a blisteringrun, gold needed to take a breather and consolidated high for over aquarter.  But that rolled over into a severecorrection on two separate events.  First gold-futures stops were run which blasted this metal back down to its 200-day moving average.  After that gold bounced sharply, but that wastruncated by Trump’s surprise election win in early November 2016.  That unleashed epic Trumphoria.

Stock markets surged onhopes for big tax cuts soon from thenewly-Republican-controlled government. That led futures speculators and investors alike to flee gold, crushingit sharply lower.  By mid-December 2016the day after the Fed’s second rate hike of this cycle, gold had plunged 17.3%to $1128.  That was not a new bearthough, as it fell shy of the necessary 20% loss.  But psychologically it may as well have been!

Thatexceedingly-anomalous gold plunge in late 2016 mostly driven by thepost-election stock-market surge wreaked tremendous sentiment damage.  The investors who started getting excitedabout gold in the first half of 2016 abandoned it, assuming that sharp rallywas a flash in the pan.  And with thestock markets powering relentlessly higher all throughout 2017 on taxphoria,gold receded into the market shadows.

A couple weeks ago Iwrote an essay delving into the selloff dynamics between stock markets and gold.  Gold is a unique asset that tends to rallywhen stock markets sell off materially, making it the ultimate portfoliodiversifier.  Thus investors tend to viewit as the anti-stock trade.  It was actually the last stock-marketcorrection in early 2016 that fueled gold’s powerful upleg early thatyear.  Stocks greatly affect gold.

While gold can stillrally when stock markets happen to be climbing, investors simply feel no needto diversify their stock-heavy portfolios. So they largely forget gold.  Thusgold sentiment for much of 2017 remained nearly as bearish as at those deeplate-2016 lows.  Investors rememberedgold spiraling lower after the election, and that continued to shape their opinionsand outlooks on gold regardless of price action.

Gold actually fared really well in 2017 consideringthe extreme stock-market rally.  Lastyear gold still powered 13.2% higher, very impressive considering theconcurrent huge 19.4% S&P 500 surge! This gold bull’s second upleg enjoyed a 19.5% gain over 8.7 monthsleading into early September.  Gold wasable to peak at $1348 before that upleg failed after stock markets surged againfollowing a new wave of taxphoria.

Even though gold neverentered a bear market, that interim-high level was problematic forsentiment.  While close, September 2017’s$1348 remained decisively below July 2016’s $1365.  For key technical levels I consider decisiveto be 1% beyond the previousextreme.  So even though a 19.5% goldupleg is nothing to sneeze at, especially in extremely-euphoric stock markets,it wasn’t enough to change psychology.

Without a newbull-market high, gold stayed out of the financial-news headlines.  The investors that had fled this leadingalternative investment in the wake of Trump’s election win saw nothing to getgold back on their radars.  The legionsof gold bears could argue that the secondary lower top confirmed gold was in adowntrend.  Technical analysis issomething of a Rorschach test, often reflecting analysts’ own biases.

That gold bearishnessreally intensified heading into this latest Fed rate hike in December2017.  As that month dawned, it had been16.8 months since gold’s initial bull-market high.  Gold’s chance to break out a few monthsearlier had failed.  So as you can seeabove, gold-futures speculators fled in terror from long positions while alsoramping shorts.  This latest gold-futuresliquidation hit all-time record highs.

Gold-futuresspeculators’ collective positions are reported once a week in the CFTC’sCommitments of Traders reports.  They arecurrent to each Tuesday.  In the CoT weekending December 12th on the eve of the Fed’s fifth rate hike of this cycle,speculators dumped an astounding 49.9k long contracts while adding 20.5k newshort ones!  That was the largest selling on record out of 989CoT weeks since early 1999!

These traders’collective bets had run to such hyper-bearish extremes that they had to meanrevert after whatever the FOMC did in mid-December.  And that has indeed happened.  But as long as gold prices just meanderwithin that giant trading range established in the first half of 2016, it willbe difficult to shift psychology back to bullish.  This week’s strong gold surge on that dollarweakness is starting to change that.

Gold’s $1358 close inUS trading Wednesday was 0.7% above its early-September peak.  While not quite at that 1%+ threshold for a decisivebreakout yet, this is still a major higher high.  Gold has been carving higher lows periodicallyever since late 2016 when that post-election selloff exhausted itself.  But higher lows don’t spark excitementoutside of existing gold investors, higherhighs are necessary for that.

Gold needs to closeover $1361 to see a decisive breakout above the last upleg’s peak.  It has traded above that level intraday in both Asian and American trading sinceWednesday’s close.  It’s only a matter oftime until $1361+ sticks on a closing basis. That’s going to finally confirm higher highs to go along with the past13.3 months’ higher lows.  But the realprize remains a decisive breakout to new bull highs.

The new gold bull againpeaked at $1365 in early July 2016 within a couple weeks of the UK’s Brexitvote.  That unexpected outcome of theBritish people voting to take back their sovereignty from the unaccountableEuropean Union bureaucrats was such a shock to the markets that major centralbanks rushed to declare they were ready to print money if necessary.  Stocks rallied sharply on hopes for more easing.

The S&P 500 hadbeen drifting sideways to lower without a single new bull-market high for 13.7 months before that.  Gold $1365 in July 2016 happened the verytrading day before the S&P 500 finally climbed to its first new recordhigh.  With stock markets apparently offto the races again, gold demand waned as investors weren’t interested indiversifying.  A single close above $1365will finally confirm gold’s bull persists!

But if gold justtouches those bull-to-date highs and fades, bearish technical analysts caneasily dismiss it as a double or triple top. In order for gold to garner financial-media attention and attractinvestors’ gazes back to it, a decisively 1%+ breakout is necessary.  That happens at $1379.  Gold is so close to a major upside breakoutto new bull highs, which will conclusively prove to all investors its currentbull market still lives.

That will really startshifting psychology away from the overwhelmingly-bearish levels it’s been stuckat since late 2016.  In a normal yeargold’s strong 2017 rally would’ve gone a long way to restore bullishsentiment.  But again gold wasovershadowed last year by the extreme stock-market surge, which stole all thelimelight.  The blind spot investorsharbor for gold will start fading when new bull-market highs are seen.

The exact timing isunknowable and not really important. Gold could power over $1379 within days, or it might take weeks.  Investment gold buying will flare againreally boosting gold once these extremely-euphoric mania-blowoff stock markets finally roll over.  Stock selloffs are great for gold, andeven a minor one will easily catapult it to decisive new bull highs.  That will dispel the fog of bearishnessplaguing gold.

$1400+ gold may seemhigh after a multi-year bear market followed by a couple years of drifting lowin this stock-market-surge-interrupted bull market, but it’s really not.  Gold first climbed above $1400 in November2010 and largely stayed there until June 2013. Over that 2.6-year span gold averaged $1595!  And it went as high as $1894 in August2011.  Gold is nowhere near historicalextremes, still relatively low.

At best gold’s youngbull was only up 29.9% over 6.7 months by mid-2016.  That’s trivial as far as gold bulls go, arounding error.  During gold’s lastsecular bull between April 2001 to August 2011, gold soared 638.2% higher in10.4 years!  Today’s young gold bullwould still be tiny even if it saw gold doubled, taking it to $2102.  That would still be well below gold’s inflation-adjusted real high from January 1980.

As I’ve been arguingcontinuously since late 2016, this young gold bull ain’t over yet!  Majorcentral banks around the world have conjured many trillions of dollars out ofthin air which have levitated world stock markets.  That really depressed gold demand.  But once these QE-bloated markets inevitablyroll over on this year’s new Fedand ECB tightening, a record flood of flight capital will likely seek theultimate hedge of gold.

Investors can playgold’s ongoing mean-reversion bull in physical gold bullion or the leading GLDSPDR Gold Shares gold ETF.  But the cominggold gains will be really amplified by the gold miners’ stocks.  As gold rises, gold miners’ profits grow muchfaster.  Thus major gold-stock pricesusually leverage gold’s upside by 2x to 3x. Smaller gold miners can doublethat again.  Gold stocks yieldlife-changing gains in gold bulls.

In essentially the samespan of that last gold bull ending in late 2011, the HUI gold-stock indexrocketed 1664.4% higher!  Last week Iwrote an essay explaining why the parallel flagship GDX VanEck Vectors GoldMiners ETF was on the verge of a major $25 upside breakout on strong earnings potential.  There’s nodoubt investors will flood into gold stocks as gold psychology changes,ultimately driving incredible gains.

While every investorneeds to have a 5%-to-10%+ portfolio allocation to gold for diversificationpurposes, great gold stocks should be added on top of that.  The beaten-down and left-for-dead goldminers’ stocks are deeplyundervalued today with gold still out of favor.  This is the only sector in all the stockmarkets likely to power much higher when everything else heads lower.  Great gold stocks are essential to own today!

At Zeal we’ve literally spent tens of thousands of hours researchingindividual gold stocks and markets, so we can better decide what to trade andwhen.  As of the end of Q4, this hasresulted in 983 stock trades recommended in real-time to our newslettersubscribers since 2001.  Fighting thecrowd to buy low and sell high is very profitable, as all these trades averagedstellar annualized realized gains of +20.2%!

The key to this success is staying informed and beingcontrarian.  That means buying low beforeothers figure it out, before gold’s bull-market breakout becomes apparent.  An easy way to keep abreast is through ouracclaimed weekly and monthly newsletters.  They 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. For only $12 per issue, you can learn to think, trade, and thrive likecontrarians.  Subscribe today, and getdeployed in the great gold and silver stocks in our full trading books!

The bottom line is thisgold bull’s third upleg is breaking out. This week gold closed above the peak from its second upleg, and is closeto a decisive breakout.  That puts goldwithin spitting distance of its bull-to-date high of $1365 from July 2016.  Once gold powers decisively above thoselevels, it will confirm to all that gold’s bull is very much alive andwell.  That will work wonders to shiftpsychology back to bullish again.

Impressively gold isdoing all this with stock markets still at mania-blowoff record highs.  Gold investment demand explodes once stockmarkets roll over, which is what ignited and fueled this gold bull’s strong initialupleg in early 2016.  So when thelong-overdue and inevitable material stock-market selling finally arrives,gold’s advance will really accelerate. Get long before this major bull-market breakout changes everything!

Adam Hamilton, CPA

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