Gold Price Upleg Still Young / Commodities / Gold & Silver 2023

Gold has been poweringhigher on balance for a couple months now, surging to major breakouts.  That upside momentum is improving sentiment,with traders growing more bullish on gold’s potential.  That is well-placed, as this upleg remainsyoung.  Major gold uplegs are three-stageevents, each having distinct drivers. The first and smallest stage isn’t even finished yet, which bodes verywell for gold and its miners’ stocks.

The yellow metal’slatest upleg was stealthily born at panic-grade lows in late September.  Over the next 2.8 months into this week, goldpowered an impressive 12.1% higher!  Yetthat remains small and young by recent-upleg standards.  Gold’s previous four uplegs in the last fewyears averaged way-bigger 28.8% gains over much-longer durations of 7.9months.  This current upleg is likelyonly getting started, with a lot to prove.

Major gold uplegs evolve through three stages of specific buying from particular traders. They are born when gold-futures speculators buy to cover shortcontracts, which is stage one.  Aftergold falls to deep lows, some catalyst spooks these guys.  So they rush to close out their risky hyper-leverageddownside bets, which is legally required. That buying soon becomes self-feeding, catapulting gold sharply higher.

That fuels enough gold upsidemomentum to increasingly attract back stage-two gold-futures long buying.  Unlike short covering which is mandatory,long buying is voluntary.  Speculators seeinggold surging want to pile on and chase its gains.  Since their total gold-futures long contractsusually outnumber their short contracts by 2x to 3x, gold uplegs’ second stagesare proportionally larger.  Mounting gainsignite stage three.

That is driven by investorsreturning to gold with their vast pools of capital dwarfing gold-futures specs’.  That makes gold uplegs’ third stages theirbiggest and longest by far, accounting for the lion’s share of their overallgains.  Stage-three investment buying canlast well over a year, compared to a couple months for stage-one gold-futuresshort covering and a half-year at best for stage-two gold-futures long buying!

Despite surging 12%+ inseveral months, today’s young gold upleg hasn’t even exhausted stage one yet.  While this upleg is technically 2.8 monthsold, gold carved a deep double bottom in early November.  So well over 19/20ths of its total gainsaccrued in just the 1.5 months since, not enough time for specs to runout of gold-futures shorts to cover and close. Stage-two and stage-three buying remain virtually nonexistent.

That all but guaranteesthis latest gold upleg has a long ways higher to run yet.  Speculators’ gold-futures positioning data ispublished weekly in the famous Commitments of Traders reports.  CoTs are current to Tuesday closes, but notreleased until late Fridays.  So thelatest-available CoT data for this essay was December 13th’s.  This chart superimposes gold and its keytechnicals over specs’ total long and short contracts.

The sole reason goldblasted higher out of its recent deep lows was frenzied gold-futuresshort-covering buying.  Goldoriginally bottomed in late September, at levels last seen after March 2020’s brutalpandemic-lockdown stock panic.  Gold’s2.5-year low was driven by total spec short contracts soaring to 185.3k, anextreme 3.8-year high!  In early Novembernear gold’s second bottom, they had surged back up to 180.1k.

But by that latest-reportedCoT week current to December 13th, they had plunged to 123.2k contracts.  So specs bought to cover a major 62.2kcontracts, the equivalent to 193 metric tons of gold!  That is a lot of buying in such a short spanof time.  That differs some from the56.4k of short-covering buying in gold’s latest upleg noted in this chart.  That’s simply due to the mismatched lowweekly resolution of those CoT reports.

Gold bottomed at $1,623on Monday September 26th.  So technicallythe prior Tuesday’s CoT data was still current that day.  All the gold-futures-contract changes in thischart are taken from the precise days of gold bottoming and topping, even ifthey don’t exactly match CoT troughs and peaks. The next CoT that was released for Tuesday September 27th betterreflects specs’ gold-futures trading hammering gold that low.

Despite that recentgold-futures short covering, this stage-one buying still likely isn’t finished.  There are a couple ways to infer that.  Speculators’ hyper-leveraged gold-futurestrading usually proves the dominant primary driver of gold’s short-term priceaction.  So I analyze every CoT report inour weekly and monthly subscription newsletters for clues on gold’s probablenear-term direction.  I developed some indicatorsto help.

One recasts speculators’total gold-futures long and short contracts as percentages of their past-yeartrading ranges.  As of December 13th inthat latest-reported CoT week, total spec shorts were still running 34% upinto their past-year range.  That impliedspec short-covering buying was about 2/3rds done with the last third remaining.  Probable gold-futures short covering isn’t exhausteduntil this indicator falls to zero.

That last happened inlate March 2022, ahead of gold’s $1,977 mid-April high from which its miserablemid-2022 plunge erupted.  In the CoT leadinginto that, total spec shorts hit 105.4k contracts.  Specs had to add 80.0k to help pummel golddown to late-September’s panic-grade low. Again 62.2k of those have been covered so far, leaving almost 1/4th leftto go.  So a fourth to a third of likelystage-one short covering remains.

But stage one is small,mainly acting as a trigger to usher in larger stage-two gold-futures long buying.  That only starts mounting after stage one pushesgold high enough for long enough to fuel sufficient upside momentum to attractback long-side speculators.  Theygenerally control way more capital than the short-side guys, making stage two proportionallymore important.  That’s when gold uplegsreally accelerate.

Over this past year, totalspec longs have outnumbered total spec shorts by an average of 2.5x inthose weekly CoT reports.  So this gold upleg’scoming second stage is likely to enjoy two-and-a-half-times the capital inflowsas stage one!  And so far spec gold-futureslong buying has barely begun, these guys have only started nibbling.  That should accelerate into early 2023, whichis super-bullish for gold and gold stocks.

Total spec longs plungedto just 247.5k contracts in late September as gold bottomed.  They had clawed back a little to 254.9k in earlyNovember, but then retreated down to 243.1k at the end of that month.  That proved an extreme 3.6-year low!  Speculators hadn’t been more bearish on goldas evidenced by very low upside bets since early May 2019.  Then such lopsided positioning necessitatedhuge mean-reversion buying.

That catapulted gold ablistering 22.3% higher over the subsequent 4.1 months!  Similar gains are likely today as stage twokicks in.  Remember today’s 12.1% goldupleg is effectively just 1.5 months old, yet to really transition from stageone to stage two.  The lack of spec gold-futureslong buying to this point is evident in similar metrics.  Total spec longs were up just 11% into theirpast-year trading range on December 13th.

Probable spec longbuying isn’t exhausted until that nears 100%, which last happened in early Marchon Russia invading Ukraine.  Huge gold-futureslong buying fueled gold’s unsustainable geopolitical spike.  So by that measure, over 8/9ths of likely stage-twospec long buying is still yet to come in this gold upleg!  Alternatively total spec longs were running393.4k in mid-April before gold rolled over hard on big futures selling.

By late November specshad dumped 150.3k contracts, yet so far only 18.6k of those have been bought backas of that latest-reported CoT.  That isless than 1/8th of the total probable stage-two buying!  So somewhere around 7/8ths to 8/9ths of that big spec gold-futures long buying remains outstanding.  And these leveraged traders are increasinglypaying attention, gold’s recent gains are starting to win them over.

In that latest-CoT-weekdata as of December 13th, specs added 12.5k long contracts.  That proved their biggest CoT week of longbuying by far since mid-April, back before gold plunged when its psychologyremained bullish!  So there’s no reasonnot to expect the much-larger stage-two spec gold-futures long buying to acceleratein the next few months.  That will superchargegold’s young upleg, ramping its gains.

That should drive goldhigh enough for long enough to start enticing investors to return,unleashing their vastly larger stage-three buying.  Unfortunately global gold investment demandis only published quarterly by the World Gold Council in its outstanding GoldDemand Trends reports.  That seriously-low-resolutiondata is too infrequent to analyze in-progress gold uplegs.  Thankfully there’s a great daily proxy mirroring it.

That is the combinedholdings of the dominant GLD and IAU gold exchange-traded funds.  As of the end of Q3’22, according to the WGCthese American behemoths commanded a whopping 40.0% of all the goldbullion held by all the world’s physically-backed gold ETFs!  The trends in their collective holdings tendto closely follow overall global gold investment demand.  And they show virtually no stage-threebuying.

GLD+IAU holdings peakednear 1,626 metric tons in mid-April 2022. Investors increasingly fled after as heavy gold-futures selling slammed gold this past summer.  DumpingGLD and IAU shares faster than gold, that ultimately forced their holdings toplunge a major 16.7% or 271t by early December! That big investor exodus from gold on downside momentum left thoseholdings running just 1,355t a few weeks ago.

With no leverage toworry about, investors follow gold price trends much more casually than those hyper-leveragedgold-futures guys.  So peaks and troughsin gold investment generally lag those in gold itself by a couple weeksto months.  Gold investors need to seeevidence of major trend changes before they will start migrating capital out orback in.  While they finally started tonibble, their stage-three buying is trivial.

Those recent GLD+IAU holdingslows proved the worst since March 2020 just emerging from that stock panic,truly extreme.  Yet as of midweek, investorshad only done enough differential GLD-and-IAU share buying to drive a trivial0.7% or 8.9t build.  That is nothing, onlyabout 1/30th of necessary capital inflows to restore GLD+IAU holdings tomid-April’s pre-gold-selloff levels. Stage three hasn’t even started yet!

Putting all thistogether, between late September to this week gold powered a nice 12.1%higher.  That was fueled by stage-one gold-futuresshort-covering buying equivalent to 193t of gold.  There’s likely at least another 56t of stage-onebuying left.  Other specs have startednibbling on the long side, doing about 58t of gold-equivalent gold-futures longbuying.  But that is merely around 1/8thof their likely total.

That implies another 410t+of spec gold-futures long buying coming in the next few months!  After that drives gold high enough for longenough to bring back investors, they should have at least another 262t of buyingto do per that GLD+IAU-holdings proxy alone. This young upleg’s ultimate stage-three buying ought to prove way largerthough, as this raging inflation and mounting stock bear are super-bullish forgold.

But sticking with theseconservative numbers, this young upleg’s total stage-one, stage-two, andstage-three buying should shake out around 988t of gold.  Yet so far only about 260t have been bought,just over a quarter of that estimated total. That means nearly three-fourths of this upleg’s likely buying isstill coming!  That is almost certain todrive gold much higher in coming months, making for a great gold new year.

Speculator gold-futuresmean-reversion buying will really accelerate on the lofty US Dollar Index’s sharp mean reversion lower.  The primary reason gold plunged 17.9% onheavy futures selling in the middle of this year is the USDX rocketed parabolicwith an epic 14.3% gain to an extreme 20.4-year high in that span!  That was driven by the most-extreme tightening the Fed has ever attempted, led by monster rate hikes.

But the Fed’s ability to hawkishly surprise has waned dramatically, as I argued back in early November when gold hoveredjust above those panic-grade lows. Indeed the USDX has collapsed 9.2% since its lofty heights, with fully9/10ths of that since early November!  Thatongoing dollar mean reversion lower as the Fed runs out of room to keep hiking willcontinue to spark big gold-futures buying, driving gold higher.

Its resulting strongupside momentum alone will be enough to increasingly attract back investors,who love chasing gains.  But this raging inflationunleashed by the Fed’s extreme money printing in recent years will superchargegold investment demand.  During the last inflation super-spikes of the 1970s, gold nearly tripled during the first then more than quadrupledduring the second in monthly-average-price terms!

Gold is heading muchhigher on remaining stage-one and still-coming stage-two gold-futures buying, whichwill be accelerated by the US dollar returning to earth after parabolicextremes.  The resulting strong gold upsidemomentum will entice back much-larger stage-three investment buying, itself amplifiedby raging inflation hammering stock markets and eroding purchasing power.  Yet gold won’t be the biggest beneficiary.

That will prove thegold miners’ stocks, which leverage material gold moves.  This next chart overlays gold with its miners’leading benchmark, the GDX gold-stock ETF. It is already outperforming its metal’s young upleg, surging 37.4% atbest since late September.  That has amplifiedgold’s gains by 3.1x, on the high side of the major gold miners’ typical 2x-to-3xrange.  The gold stocks will fly as thisgold upleg grows!

Remember gold’s lastfour uplegs averaged 28.8% gains in 7.9 months. GDX’s last four averaged 70.2% gains in pretty much the same timeframe,leveraging gold by 2.4x.  And the last twouplegs of both gold and gold stocks were prematurely truncated by anomalous heavy gold-futures selling on extreme Fed hawkishness.  The prior two normal gold and GDX uplegsaveraged massive 41.4% and 105.4% gains!

Given today’s backdropof the first inflation-super-spike since the 1970s ravaging investments, goldcould easily blast another 40%+ higher before this latest young upleg gives upits ghost.  A 40% gain off its deeplate-September low would catapult gold up near $2,275!  All the excitement that generated would blastgold stocks stratospheric with life-changing gains, especially in smallerfundamentally-superior miners.

Researching and tradingthe better mid-tier and junior gold stocks has been our specialty at Zeal for over two decades now.  We aggressively added new trades at fire-saleprices in recent months surrounding gold’s bottoms, filling our newslettertrading books.  Their unrealized gainsare already running as high as +73.2% mid-week!  All speculators and investors need gold-stock portfolioallocations given gold’s bullish outlook.

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 gold’supleg is still young.  Gold’s strongrecent gains were mostly driven by stage-one gold-futures short-coveringbuying, which isn’t even finished yet. The much-larger stage-two gold-futures long buying and stage-threeinvestment buying has barely started.  Aroundthree-fourths of the probable gold buying likely to fuel this upleg remains, allbut guaranteeing the lion’s share of gold’s gains are still coming.

And that’s not evenconsidering extreme market events that should supercharge gold demand.  Those include the lofty US dollar meanreverting much lower and the first inflation super-spike since the 1970sraging.  They will almost certainly fuel muchlarger gold-futures buying and investment demand than usual.  The resulting powerful major gold upleg willcatapult battered gold stocks far higher, an epic opportunity.

Adam Hamilton, CPA

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