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Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

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Gold Enters A New Bull Market


Gold finally surged to new bull-market highs this week! Several years after its last bull high, gold punched through vexing resistance after the Fed continued capitulating on ever normalizing. This huge milestone changes everything for gold and its miners’ stocks, unleashing new-high psychology fueling self-feeding buying. With speculators not yet all-in and investors wildly underdeployed, gold has room to power much higher.

Gold momentum has certainly been building for a major upside breakout. Back in mid-April with gold still near $1300, I wrote an essay describing the “Gold-Bull Breakout Potential” and why it was finally coming. Then a couple weeks ago with gold in the $1330s, I published another one analyzing “Gold Surges Near Breakout”. For several years higher lows had slowly compressed gold ever closer to surging over resistance.

Today’s gold bull was first born back in mid-December 2015 the day after the Fed’s initial rate hike in its just-abandoned tightening cycle. Gold’s maiden upleg was massive, rocketing 29.9% higher in just 6.7 months to $1365 in early July 2016! But that first high-water mark has proven impregnable over the 3.0 years since. Gold tried and failed to break out in 2017, 2018, and 2019, repelled near a $1350 Maginot Line.

While gold mostly climbed on balance, the lack of higher highs really impaired traders’ view on this asset. New bull highs generate enthusiasm, enticing capital inflows. When prices fail to achieve new bull bests from time to time, traders’ interest wanes. Gold was largely forgotten, even though it technically remained in a bull market since there had been no 20%+ selloff. Psychology needed new bull highs decisively over $1365.

While they were inevitable sooner or later here, I sure didn’t expect them this week. June is peak summer doldrums, the weakest time of the year seasonally for gold. And US stock markets remain way up near recent all-time record highs, steeped in euphoria. That has really stunted gold demand in recent years. So the odds favored gold’s long-overdue bull-market breakout getting pushed later into July or August.

But this metal was defying weak seasonals to inch inexorably closer. It closed at $1340 on June 7th, $1342 on the 13th, and $1346 this Tuesday the 18th. That was the day before the latest Fed decision. The Federal Open Market Committee had really painted itself into a corner. It had shifted dovish so hard in recent months that traders’ expectations for a new rate-cut cycle starting seemed impossible to meet.

Had the Fed not been dovish enough, the US dollar would’ve surged unleashing sizable-to-serious gold-futures selling. But amazingly the FOMC managed to neither cut rates nor tease a rate cut at its next meeting in late July, yet still convince traders it was ready to cut. That masterful sleight of hand came in the quarterly dot plot, the collective future federal-funds-rate forecasts of top Fed officials. They were dovish.

Back in late September before the flagship S&P 500 stock index plunged 19.8% in a severe near-bear correction, the dots predicted 5 more rate hikes including 3 in 2019 and 1 in 2020. After December’s 9th hike of this cycle, the mid-December dot plot only moderated to 2 in 2019 and 1 in 2020. In the next dot plot in late March, this year’s hikes were struck but 2020’s lone 1 remained. That led into this week’s dot plot.

Traders were expecting almost 4 rate cuts over the next year heading into this FOMC decision, which seemed like a bridge too far. And it was! Top Fed officials’ neutral 2019 outlook of no rate hikes stayed unchanged, no cuts were added. I’m surprised the US dollar didn’t surge on that, indirectly hitting gold. But the dot plot did eliminate 2020’s lone hike and pencil in 2 cuts instead, which was a major dovish shift.

So improbably in mid-June with the S&P 500 just 0.7% off late April’s all-time-record peak, gold caught a bid. Even before Wednesday’s 2pm release of the FOMC statement and dot plot, gold held steady near $1345. When the Fed headlines hit and currency traders interpreted them as dollar-bearish and sold, gold shot up to $1354. It gradually climbed from there to challenge $1360 by the end of that US trading day.

Gold’s full reaction after major FOMC decisions often isn’t apparent until the next trading day though, after Asian traders can react. Their markets are closed when the Fed makes its announcements. As Asian markets opened Thursday morning which was late evening Wednesday US time, gold rocketed from $1358 to $1385 in about an hour! Being a markets junkie, I always check overseas action last thing before bed.

I could hardly believe my eyes that night, and verified gold’s price in multiple trading accounts. This gold bull was breaking out! A decisive breakout is 1%+ beyond an old key level. That translated into $1379 off July 2016’s seemingly-ancient $1365 bull-to-date peak. If those gains could hold into the US close on Thursday, a decisive breakout would be confirmed. In early summer with euphoric US stock markets no less!

These charts are current to Wednesday’s Fed-Day closes. In order to write and proof these essays on Thursdays to publish on Fridays, Wednesdays are the data cutoff. But as I pen these words on midday Thursday, gold is still trading at $1385 in US markets. This breakout looks like the real deal, the answer to contrarian investors’ prayers. And speculators’ gold-futures positioning shows room for more buying!

Because of the extreme leverage inherent in gold futures, their traders wield outsized influence over the short-term gold price. At $1350 gold, each 100-ounce contract controls $135,000 worth. Yet traders are now only required to hold $3400 cash in their account per contract. That equates to absurd maximum leverage of 39.7x. Each gold-futures dollar has up to 40x the gold-price impact as a dollar invested outright!

This chart superimposes gold in blue over speculators’ total gold-futures positions, with long upside bets in green and short downside bets in red. Note that while gold has spent several years struggling with that $1350 overhead resistance, it has carved major higher lows. That has coiled gold into a giant tightening ascending-triangle technical formation. These patterns are usually resolved with strong upside breakouts.

(Click to enlarge)

Speculators’ collective gold-futures bets are reported weekly late each Friday afternoon, current to the preceding Tuesday. So the latest data available when this essay was published was as of June 11th, 6 trading days before the Fed’s shift into forecasting rate cuts coming. Gold did rally 1.5% over the next Commitments-of-Traders-report week ending this Tuesday the 18th, so specs had to be buying gold futures.

But this latest-available data still offers some great insights. Total spec longs and shorts were running 299.1k and 97.1k gold-futures contracts nearing the FOMC decision. Those shorts were actually at a 14.3-month low, leaving big room for aggressive short selling. I was worried heading into this week’s Fed meeting that it would disappoint by not being dovish enough, igniting a dollar rally triggering gold-futures shorting.

With shorts so low, the risk of a short-term gold selloff remains high. But high gold prices really stamp out any zeal traders have for short selling gold futures at extreme leverage. At 39.7x, a mere 2.5% gold rally would wipe out 100% of the capital risked by short sellers! So in the several months following recent years’ major $1350 breakout attempts, spec shorts stayed low. They didn’t climb until gold started falling.

Major gold uplegs have three stages. They are initially triggered by gold-futures short covering which quickly exhausts itself after a couple months or so. Note above that gold’s 15.9% upleg as of Wednesday was largely fueled by a massive 153.7k contracts of short covering! That was necessary after spec short selling soared to all-time-record highs late last August, forcing gold to the lows which birthed this upleg.

After first-stage short covering, the second stage is fueled by gold-futures long buying. So far that has been relatively minor, just 41.0k contracts as of the latest CoT data. Again heading into the FOMC, the specs were only long 299.1k contracts. That is much lower than at past $1350-breakout attempts, which implies much more room to keep buying from here. This is very bullish for gold unless short selling flares up.

Back in early July 2016 when gold rocketed to this bull’s initial $1365 peak, it was fueled by spec longs soaring to 440.4k contracts! That was a whopping 141.3k or 47.2% higher than the latest read. The next major $1350 breakout attempt came in early September 2017, driven by total spec longs surging way back up to 400.1k contracts. That too was 101.0k or 33.8% higher than recent levels leading into the Fed.

In late January 2018 that vexing upper resistance repelled another valiant gold breakout attempt. Total spec longs crested at 356.4k then. That was 57.3k or 19.2% higher than the latest data. So assuming there wasn’t massive gold-futures long buying leading into this Tuesday, there’s still room for gold-futures speculators to buy another 57k to 141k contracts! Such big long buying would propel gold well higher from here.

But far more bullish than that is the potential stage-three investment buying. While speculators have the leverage, investors control vastly-larger pools of capital. All the stage-one gold-futures short covering and stage-two gold-futures long buying is just an ignition mechanism to entice investors to return. Once they do, their big capital inflows can ignite strong virtuous circles of buying that persist for months or even years.

The higher gold climbs, the more investors want to own it. The more they buy, the higher gold rallies. As investors love chasing winners, nothing drives buying like new highs. New-high psychology is easily the most-powerful motivator fueling big investment buying. And gold investment remains very low even this week as gold’s bull-market breakout neared. This is evident in the leading gold ETF’s gold-bullion holdings.

The American GLD SPDR Gold Shares dominates the gold-ETF world, acting as the primary conduit for American stock-market capital to flow into and out of gold. I discussed this in depth a couple months ago in another essay on stock euphoria and gold. As of this Wednesday as gold surged back to $1360 on that Fed capitulation from tightening, GLD held 764.1 metric tons of physical gold bullion for its shareholders.

In early July 2016 when gold first hit $1365, GLD’s holdings ran far higher at 981.3t. That was 217.2t or 28.4% higher than this week’s levels! At that next major $1350 breakout attempt in early September 2017, GLD’s holdings were 836.9t or 9.5% above today’s levels. And at January 2018’s attempt this key metric for gold investment hit 849.3t, or 11.2% higher than this week. There’s lots of room for investors to buy!

GLD’s holdings haven’t really soared since the first half of 2016 when gold rocketed 29.9% higher in this bull’s maiden upleg. That was the last time new bull highs made investors excited about gold. So their potential buying from here is much bigger than the GLD holdings near $1350 breakout attempts suggest. The total GLD build in that huge H1’16 gold upleg was 351.1t or 55.7%. Consider that from recent lows.

In early October GLD’s holdings sunk to a deep 2.6-year secular low of 730.2t. That was before the US stock markets started plunging in Q4’s severe near-bear correction, so gold was deeply out of favor with stock euphoria extreme. A similar total build of 350t from there as gold returns to favor among investors would push GLD’s holdings over 1080 metric tons. That would represent a 47.9% total upleg build, not extreme.

And American stock investors pouring enough capital into GLD to force it to grow its physical-gold-bullion holdings to 1080t isn’t a stretch. Back in early December 2012 fully 15.6 months after gold’s last secular bull peaked, GLD’s holdings hit their all-time high of 1353.3 metric tons. That’s 77% higher than this week’s levels, proving investors have vast room to shift capital back into gold given their current low allocations.

One way of inferring gold investment is looking at the ratio of the value of GLD’s gold holdings to the total market capitalization of all 500 elite S&P 500 companies. From 2009 to 2012 that averaged 0.475%, for an implied gold portfolio allocation near 0.5% for American stock investors. That’s terrible, as every investor needs a 10% allocation in gold and its miners’ stocks! But 0.5% is still far higher than today’s levels.

When the SPX recently peaked at the end of April, this ratio was running around 0.12%. That’s only a quarter of that average from recent years before gold fell deeply out of favor. Today investors are so radically underinvested in gold that their portfolio allocations need to quadruple from here to merely return to quasi-normal levels! So there’s room for great amounts of capital to return to gold, driving it much higher.

Again my data cutoff for this essay was Wednesday’s close, before gold started breaking out. At that point its gold bull to date was 29.9% higher at best as of several years earlier. The last secular gold bull ran between April 2001 to August 2011. Over that 10.4-year span, gold powered a massive 638.2% higher! So gold ultimately doubling or tripling from this bull’s birthing low of $1051 certainly isn’t a stretch at all.

With this gold bull finally breaking out after several years of vexing failures, there are dozens of charts I’d like to share today. But I’m settling with three so you don’t have to read a book. Again June happens to be gold’s weakest time of the year seasonally, which gold’s breakout surge is bucking. But despite the wonderful emerging new-high psychology, gold’s advance isn’t particularly outsized even for summer doldrums.

This chart looks at gold’s average summer performances in all modern bull-market years. Each summer is individually indexed to its final close in May, keeping gold price action perfectly comparable regardless of prevailing levels. The yellow lines show 2001 to 2012 and 2016 to 2017. Last year’s summer action is rendered in light blue for easier comparison. All these lines are then averaged together into the red one.

That reveals the center-mass drift trend of gold in market summers, which include June, July, and August proper. Gold’s current 2019 summer action is superimposed over all that history in dark blue. At least as of gold’s $1360 Wednesday close following the FOMC, it was only up 4.2% summer-to-date. That is still within the typical gold summer trend of +/-5% from May’s close. This gold summer rally is big, but not extreme.

As I continue writing this essay early Thursday afternoon, gold is trading near $1386. That is up 6.2% since the end of May. In the summer of 2016 the last time gold was in favor and enjoying that new-high psychology, it rocketed as high as +12.3% summer-to-date by early July. So while early summers tend to be weak, gold can still power higher in the right conditions. And a major bull-market breakout is definitely it!

The main beneficiary of higher gold prices is the gold miners. They enjoy big profits leverage to gold as its price rallies higher. Last week I wrote a whole essay on this “Gold-Stock Upleg Mounting” where I went into leverage. The leading gold-stock benchmark is the GDX VanEck Vectors Gold Miners ETF. In mid-May I dug into its component gold miners’ latest Q1’19 results, revealing their current fundamentals.

The GDX gold miners’ average all-in sustaining costs last quarter were $893 per ounce mined. When compared to Q1’s average gold price near $1300, at $1400 and $1500 gold the major gold miners’ profits would soar 25% and 49% higher! So naturally gold-stock prices are surging with gold’s awesome bull-market breakout this week. Here’s the latest chart of gold-stock performance per GDX as of Wednesday.

(Click to enlarge)

Since late 2016 the gold stocks have been trapped in a giant consolidation by gold remaining mostly out of favor with investors. That manifested in GDX terms in a major trading range running from $21 lower support to $25 upper resistance. On Fed Day as gold rallied to $1360, GDX’s price climbed to $24.00 on close. That was a 16.7-month high for this leading gold-stock benchmark, and nearing its own breakout.

Early Thursday afternoon as I pen this essay, GDX has surged again to $25. That’s right at that major resistance line of recent years. A decisive breakout from here would portend gold stocks finally being off to the races again. And that means enormous gains for contrarian speculators and investors. In essentially the first half of 2016 as gold blasted 29.9% higher, GDX skyrocketed 151.2% for huge 5.1x leverage!

As of Wednesday this current gold-stock upleg per GDX only had 36.6% gains. As gold’s own new-high psychology makes gold stocks alluring again, they should soar dramatically from here. We haven’t seen a real gold-stock upleg in several years. Just like gold, when its miners’ stocks are powering to new highs buying begets buying. Traders love chasing their gains which fuels a glorious virtuous circle of capital inflows.

For years traders have told me they were avoiding gold stocks until something big changed. And there is nothing bigger for this high-potential sector than new gold-bull highs. All the stars are aligning for big gold-stock gains in the coming months, with their technicals, sentiment, and fundamentals all looking very bullish. This is not the summer to check out, but to do your homework and get deployed in great gold stocks.

Unfortunately the major gold miners dominating GDX are failing to grow their production. That along with their large market caps means smaller mid-tier and junior gold miners with superior fundamentals will enjoy far-better upside as gold climbs higher. While GDX should amplify gold’s gains by 2x to 3x, that will be dwarfed by the epic gains in better smaller miners. Major gold uplegs are a gold-stock pickers’ market!

The bottom line is gold is finally breaking out to new bull-market highs! Somehow the FOMC managed to be dovish enough in its rate-cut outlook this week to drive US-dollar selling, which unleashed major gold buying. So gold blasted back over its bull-to-date peak from several years earlier that had oppressed it for so long. Gold hasn’t enjoyed new-high psychology since then, which is a powerfully-bullish motivating force.

New bull highs bring gold back into the limelight, making it attractive again. Traders love chasing winners to ride their upside momentum, and buying begets buying. Gold coming back into favor portends much more upside to come, with room for big buying by both gold-futures speculators and far-more-important investors. As their capital inflows push gold to new bull-market heights, the gold stocks are going to soar!

By Adam Hamilton

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