Gold Surges Near Breakout / Commodities / Gold & Silver 2019

Gold surged sharplyover this past week or so, nearing a major bull-market breakout!  Nearly everyone was surprised by this violentawakening, which erupted suddenly as gold languished around year-to-date lows.  If this dramatic rally has staying power,gold has good odds of achieving decisive new bull-market highs.  That would change everything psychologically,ushering gold and its miners’ stocks back into favor.

Gold has largely flownunder traders’ radars this year, mostly drowning in apathy.  Actually this unique asset had a strong start,climbing 4.6% year-to-date by mid-February to hit $1341.  While merely a 10.1-month high, gold was closeto a major bull-market breakout.  Forseveral years now, gold has faced stiff resistance around $1350.  It has repelled gold multiple times, lookinglike an impregnable Maginot Line.

But gold’s promisingascent was short-circuited from there, unleashing a disheartening slump overthe next 10 weeks or so.  By early May,gold had retreated 5.2% to $1271.  Theprimary culprit was resurgent euphoria in the US stock markets.  Equity exuberance has long proven gold’smortal nemesis.  When stock markets arehigh and expected to continue climbing on balance, gold investment demand oftenwithers.

The recent gold actioncan’t be understood without the context of the US stock markets as representedby their flagship S&P 500 index (SPX). Heading into last September, the SPX was marching to a series of new all-timerecord highs.  Since gold tends to climbwhen stock markets sell off, there was little demand for this essential portfoliodiversifier.  Why buy gold when stocksseem to do nothing but rally indefinitely?

That who-caressentiment helped fuel all-time-recordshort selling in gold futures, hammering gold down to $1174 in mid-August fora 19.3-month low.  Stuck in the shadowsof euphoric stock markets, gold largely drifted sideways from there averaging$1197 until early October.  But on October10th, hyper-complacent stock traders were finally confronted with a seriousselloff as the SPX plunged 3.3% that day alone.

Earlier hawkishcomments from the Fed chairman were to blame. With stock markets bleeding, traders remembered gold.  The world’s leading and dominant goldexchange-traded fund is the GLD SPDR Gold Shares.  According to the latest data from the venerableWorld Gold Council, GLD’s 784.3 metric tons of gold bullion held in trust forits shareholders at the end of Q1’19 represented 31.6% of global gold ETFs’total.

In early October withthe SPX just fractionally under its recent record peak, GLD’s holdings slumped toa deep 2.6-year secular low of 730.2t. But a few trading days later as the SPX’s sudden and sharp plunge startedto kill complacency, GLD enjoyed a big 1.2% holdings build.  When stock traders buy GLD shares at a fasterpace than gold itself is being bought, GLD’s managers equalize that excessdemand by buying gold.

That SPX selloffsnowballed into a severe near-bear correction, down 19.8% by ChristmasEve.  With the stock markets burning, investorsremembered the timeless wisdom of prudently diversifying their stock-heavyportfolios with counter-moving gold.  Ithad rallied 8.1% in 4.3 months by the time a super-oversold SPX was ready tobounce.  That gold upleg kept growing,ultimately extending to 14.2% gains by mid-February.

But as gold neared thatmajor $1350 bull-market breakout then, stock euphoria came roaring back with avengeance.  The SPX had rocketed 18.2%higher out of its correction low by then, fueled by a radical shift back todovishness by the Fed!  It completely capitulatedand caved to the stock markets, declaring that its quantitative-tightening monetarypolicy was open for adjustment in contrast to earlier statements on QT.

By that point the SPXhad regained nearly 3/4ths of its total correction losses, so exuberant-againtraders started to forget gold.  Goldinvestment demand peaked in late January the day before the Fed gave in on QT,capping a 12.8% GLD-holdings build over 3.8 months.  The higher the SPX rallied in recent months,the greater stock euphoria grew and the more gold was forgotten.  Yet again stock euphoria stunted gold.

The SPX peaked at theend of April at another new all-time-record high.  That extended its total monster-bouncerebound rally since late December to a colossal 25.3% in 4.2 months!  A couple days later in early May with the SPXstill near records, gold fell to that $1271 YTD low.  Euphoric stock investors’ exodus from gold persistedanother week, when GLD’s holdings slumped to 733.2t.  That was down 11.0% in 3.3 months.

Gold failed to breakout above its years-old $1350 resistance zone in mid-February because skyrocketingstock markets forced it back out of favor. Between late January and mid-May, fully 97% of GLD’s holdings build fueledby the SPX’s severe near-bear correction largely in Q4 had been erased!  Just like late last summer, gold was againhostage to lofty euphoric stock markets. Investors wanted nothing to do with it.

But the SPX startedrolling over again in May, slowly at first. It was shoved after Trump got fed up with China backtracking on nearly ayear’s worth of trade negotiations with the US. On May 5th he warned that tariffs on $200b of annual Chinese importswould blast from 10% to 25% going effective the following Friday.  That gradually drove the SPX lower intomid-May, including serious 1.7% and 2.4% down days.

So once again just likein October the last time the SPX rolled over hard, gold caught a bid.  It rallied back up to $1299 in mid-May asinvestors again remembered stock markets can also fall.  GLD’s holdings began modestly recovering asstock-market capital started slowly migrating back into gold.  But that nascent trend reversed again inmid-May as stock markets bounced sharply higher, unleashing surging euphoria.

The primary driver ofgold in recent years has been stock-market fortunes.  Gold often falls out of favor when stockmarkets are high and rallying, then starts returning to favor when they selloff again.  In a very real sense gold isthe anti-stock trade.  While it doesn’t onlyclimb when stock markets weaken, that’s what mainstream investors remember goldfor.  Its investment demand is rarelystrong near stock-market highs.

So gold again slumpedback near $1273 by late May as the SPX rebounded, further demoralizing the few remainingcontrarians.  This metal felt prettyhopeless heading into its summerdoldrums, its weakest time of the year seasonally.  Then a Trump bombshell shocked stock traders outof their complacency.  He warned the USwas levying escalating tariffs on all Mexican imports to force Mexico tofight illegal immigration!

Last Friday May 31stwas the first trading day after that surprise, and the SPX fell 1.3% to itslowest close since its all-time-record peak a month earlier.  That extended its total recent selloff to6.6%, so worries mounted.  Gold had closedat $1288 in the prior day’s US trading session. Overnight after Trump’s tweet on Mexico tariffs gold rallied to $1297.  That upside continued in the US, with goldclosing 1.3% higher at $1305.

$1300 is a critical psychologicalline, heavily coloring sentiment especially among hyper-leveraged gold-futuresspeculators.  They tend to buyaggressively when gold regains $1300 from below, and sell hard when gold breaksunder $1300 from above.  But whilegold-futures trading heavilyinfluences short-term gold price action, only sustained investmentbuying can ultimately growgold uplegs to major status.

GLD’s holdings are thebest daily proxy available of gold investment demand.  And last Friday when gold surged, GLD merelysaw a small 0.3% holdings build. American stock investors weren’t buying gold, it was the gold-futuresspeculators.  These traders control far-lesscapital than investors, so their available buying firepower to push gold higheris limited.  Gold uplegs never reachpotential without investment demand.

The Asian markets wereclosed last Friday as gold rallied back over $1300 in the States.  So when they opened again this past Monday June3rd, Asian traders piled on to the gold buying. By the time the US stock markets neared opening that day, gold was alreadyup to $1317 in overnight trading.  Once againthat global momentum carried into the US session, helping gold surge another1.5% higher to $1325!

While great to see,that was still just a 3.2-month high. Without investment demand, gold’s new surge was unlikely to last very longon gold-futures buying alone.  Butsomething big changed that day in the US markets.  American stock traders, which had mostlyshunned gold since late January, took notice. They started shifting capital back into gold via GLD shares in a majorway, driving a huge 2.2% build in its holdings!

That was the biggestsingle-day percentage jump in this leading gold ETF’s holdings in 2.9 years,since early July 2016.  That happened tobe soon after the UK’s surprise pro-Brexit vote, when gold soared on theresulting uncertainty.  While one daydoesn’t make a trend, such a massive shift in gold investment buying is definitelyattention-grabbing.  If investorscontinue returning on balance, gold is heading way higher.

As this chart shows,gold is now within easy striking distance of a major bull-market breakout!  It is not only nearing that vexing $1350resistance zone, but has a high base from which to launch an assault.  If gold-investment demand persists, golddoesn’t have far to run to hit new bull-to-date highs.  Of course further stock-market weakness onbalance would greatly help, but it’s not necessary with new-high psychology.

Blinded by apathy, notmany traders realize gold still remains in a secular bull market.  It was born from deep 6.1-year secular lowsin mid-December 2015, the day after the Fed’s first rate hike in its latest tightening cycle.  Over the next 6.7 months gold soared 29.9%higher in a massive upleg, entering new-bull-market territory at 20%+ gains.  That left gold very overbought, so it crestedat $1365 in early July 2016.

After strongbull-market uplegs big corrections are totally normal to rebalance sentiment,bleeding off the excessive greed at preceding highs.  Gold consolidated high just under $1350 afterthat initial upleg, then fell to its 200-day moving average.  It had resumed rallying in October 2016, but reversedsharply after Trump’s surprise election victory in early November.  That pivotal event indirectly forced goldinto a nosedive.

Gold plummeting in thatelection’s wake was the result of incredible euphoria, or Trumphoria at thattime.  Trump not only won the presidency,but Republicans controlled both chambers of Congress.  So stock markets soared on hopes for bigtax cuts soon.  The SPX surged dramaticallyhigher on truly-epic levels of euphoria, which in turn battered gold.  Most investors shun gold when stock marketslook awesome.

That greatly exacerbatedgold’s normal correction to a monster 17.3% over 5.3 months!  While very ugly and miserable, that remainedshy of the 20%+ selloff necessary to qualify as a new bear market.  Thus gold’s bull remained alive and well,albeit wounded by such a serious loss. Still gold recovered to power 20.4% higher over the next 13.3 months intoearly 2018, despite the SPX continuing to soar dramatically.

In late January 2018gold peaked at $1358 just a couple days before the SPX’s own extremely-euphoricall-time-record high.  While stockeuphoria stunts gold investment demand, gold can still rally in lofty stockmarkets if it has sufficient capital-inflow momentum.  But unfortunately buying was exhausted, then goldagain consolidated high just under $1350 like it had done a couple summersearlier.  It couldn’t break out.

A few months later goldwas beaten down into another 13.6% correction over 6.7 months.  It started on a sharp rally in the US dollar,which motivated gold-futures speculators to sell aggressively.  Then the gold downside persisted on investors exiting as theSPX marched back up towards record highs after a sharp-yet-shallow-and-short10.2% correction in early February 2018.  Gold apathy and despair flared again.

But gold bottomed latelast summer as extreme recordgold-futures shorting exhausted itself, and started recovering higheragain.  That young upleg really acceleratedwhen the SPX rolled over into that severe near-bear correction largely in Q4’18.  That extended gold’s latest gains to 14.2%over 6.1 months as of that latest major interim high of $1341 in mid-February.  Check out this gold bull’s resulting entirechart pattern.

After a strong starthitting $1365 several summers ago, gold couldn’t punch through to new bullhighs.  It tried several times, butstock-market euphoria and heavy gold-futures selling on US-dollar strength keptbatting it back down.  Although goldcouldn’t make new-high progress, it did carve a nice secular series of higherlows.  While higher lows aren’t asexciting and attention-grabbing as higher highs, they are very bullish.

Flat highs combinedwith rising lows have created a gigantic ascending-triangle technicalformation in gold over the past several years.  That’s very clear above, gold coiling ever-tighterbetween climbing lower support and horizontal upper resistance.  Ascending triangles are bullish chart patternsthat are usually resolved with strong upside breakouts.  Gold has spent recent years being accumulatedbehind the scenes.

No new bull-markethighs along with gold being overshadowed by the stock markets surging to theirown all-time-record highs in recent years has left this gold bull in stealthmode.  Few investors realize it is stillunderway, and nearing a major bull-market breakout.  But once that process become apparent, goldwill quickly return to radars and become big financial news.  Then gold enthusiasm will rapidly mushroom.

Any close over thatvexing multi-year $1350 upper-resistance line will catch attention.  But gold will have to break out decisively above there, exceeding $1350 by 1%+, to really attract the limelight.  That would be $1364 gold.  This Wednesday at the data cutoff for thisessay, gold closed at $1331.  That onlyleft another 2.4% to climb to hit that decisive-breakout level.  That’s trivial when investment capital isreturning.

This gold bull’s firsttwo uplegs averaged 25.2% gains.  Today’sthird upleg only ran 14.2% back in mid-February before the monster stock-marketbounce’s extreme euphoria temporarily derailed it.  All it would take for gold to extend to thatkey $1364 level is for this upleg to grow to 16.2%.  That would still be modest, well behind thefirst two uplegs’ 29.9% and 20.4% gains.  A decisive breakout is very close from here!

And once gold headsover its $1365 bull-to-date peak of July 2016, gold investment will start becomingpopular again.  Financial-media coveragewill explode, and be overwhelmingly positive. Investors love chasing winners, and nothing motivates them to buymore than new bull-market highs.  We’veseen that in spades in the stock markets in recent years.  Major buying from highs often becomes self-feeding.

The virtuous circle of inflowsdriven by new-high psychology can get very powerful.  The more gold rallies, the more traders wantto buy it to chase the momentum.  Themore they buy, the faster gold rallies. Gold hasn’t enjoyed positive capital-inflow dynamics like this since summer2016.  The potential gold upside fromhere as this unique investment returns to favor is big, supported by keytailwinds not enjoyed in years.

Starting from mid-August’sdeep gold low, 20% and 30% total uplegs would catapult this metal way up to $1408and $1526!  Major new bull-market highsin gold would happen with a backdrop of dangerously-overvalued stock markets rolling over, greatly increasing the investment appeal of gold.  And since the SPX is unlikely to keep surgingto more record highs, stock euphoria shouldn’t arise to retard gold’s ascent.

The amount of goldbuying investors need to do is staggering, as they are radically underinvested.  Every investor needs a 10% portfolioallocation in gold and its miners’ stocks, period.  Their current allocations to gold arevirtually nonexistent per the leading proxy. For Americans it is the ratio between the total value of GLD’sgold-bullion holdings and all 500 SPX stocks’ collective market capitalizations.  This is super-low.

At the end of April atthe SPX’s latest peak, its stocks commanded a total $26,048.3b market cap.  That is colossal beyond belief.  Meanwhile GLD’s 746.7t of gold that day wereonly worth $30.8b at $1283.  That impliesAmerican stock investors had a gold portfolio allocation around 0.12%, effectivelynothing!  Merely to boost that to even0.5%, their gold holdings would have to quadruple.  There’s vast potential for gold buying.

Another thing going ingold’s favor is the high US-dollar levels.  Its leading benchmark the US Dollar Index hit23.3-month highs in late April, then revisited those levels in late May.  Gold-futures speculators tend to sell gold ona strengthening dollar and buy gold on a weakening dollar.  The dollar is likely to drift lower in futuremonths too, adding to gold’s momentum. The high dollar irks the Trump Administration, hurting US exports.

So gold is nearing a majorbull-market breakout that will change everything, wildly improving investors’gold outlook and thus investment demand! The main beneficiary of higher gold prices will be the stocks of itsminers.  This chart shows the samegold-bull timeframe in the leading GDX VanEck Vectors Gold Miners ETF.  I analyzed the latest Q1’19 fundamental results from its miners in depth just several weeks ago.

This essay is focusedon gold so I’ll discuss gold stocks in a future one.  For our purposes today, note how GDX ispositioning for a major breakout of its own above years-old $25 upper resistance.  So far GDX’s current upleg is only 33.0%higher at best, small for this volatile high-potential sector.  When gold powered 29.9% higher in essentiallythe first half of 2016, GDX amplified its gains with a monster 151.2% upleg!

So with gold on theverge of a major bull-market breakout, the beaten-down gold stocks are theplace to be to greatly leverage gold’s upside. Since the gold-stock ETFs are burdened with underperformers at higher weightings, the best gains will be won in individual gold stocks withsuperior fundamentals.  The kind of upsidethey can accrue during major gold uplegs is amazing, really multiplying wealth rapidly.

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 arecurrently full of these better gold and silver miners.  Mostly added in recent months as gold stocks recovered from deep lows, theirprices remain relatively low with big upside potential as gold rallies!

If you want to multiplyyour capital in the markets, you have to stayinformed.  Our newsletters are a greatway, easy to read and affordable.  They drawon my vast experience, knowledge, wisdom, and ongoing research to explain what’sgoing on in the markets, 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-termstock-market average.  Subscribe today for just $12per issue!

The bottom line is goldjust surged near a major bull-market breakout. The $1350 resistance zone that has vexed gold for years is once againwithin easy range.  All it will take todrive gold to new bull highs over $1365 is sustained investment buying.  And that’s not a tall order with the stockmarkets starting to roll over again after record highs.  GLD just enjoyed its biggest daily build inseveral years this Monday.

Once gold gets to newbull-market highs, psychology will shift rapidly in its favor.  Gold financial-media coverage will soar, andwill be overwhelmingly positive.  Thiswill motivate investors and speculators alike to shift capital back into gold tochase its upside momentum.  The potentialgold and gold-stock gains with sentiment turning favorable are massive.  It’s best to get deployed before gold’sbreakout unleashes this.

Adam Hamilton, CPA

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