Fed hawkishness has been the rankling thorn in gold’s side for 18 months now. Since the Fed started this monster rate-hike cycle, every material gold and gold-stock selloff has been driven by the threat of more rate hikes. Those boost the US dollar, triggering gold-futures selling. But the Fed’s hawkish spell over traders is waning. Gold and the miners weathered this week’s latest hawkish FOMC meeting pretty well.
The Federal Open Market Committee catapulted its federal-funds rate up an extreme 525 basis points off zero in just 16.3 months into late July! That blasted the FFR to a lofty 22.4-year secular high of 5.38%. And this scorching rate-hike cycle was even more violent internally, with over 4/5ths of it happening in just 9.0 months into mid-December! The Fed has never before hiked so big and fast from such low levels.
The resulting higher US yields ignited a parabolic moonshot in the US dollar. In just 6.0 months into last September, the benchmark US Dollar Index skyrocketed 16.7%! The leveraged gold-futures speculators who dominate gold’s short-term price action closely watch the dollar’s fortunes for their trading cues, and do the opposite. So gold plummeted 20.9% in 6.6 months on heavy and relentless gold-futures dumping!
The mean-reversion rebounds out of those extreme anomalies were fierce, with gold fully recovering in a powerful 26.3% upleg over the subsequent 7.2 months into early May. Since then gold has drifted lower in a stubborn pullback fueled by dollar bear-market rallies. My essay last week analyzed this whole Fed-dollar-gold dynamic in depth if you need to get up to speed. The latest FOMC meeting this week builds on that.
After eleven rate hikes since mid-March 2022 including four 75bp behemoths, the FOMC wasn’t expected to hike again Wednesday with futures-implied odds near zero. The FOMC statement itself released after that meeting was virtually unchanged from the prior one in late July. Traders were far more interested in top Fed officials’ federal-funds-rate projections, which are published quarterly after every-other FOMC meeting.
This latest Summary of Economic Projections proved very interesting and somewhat contradictory. In just one quarter since their last forecasts, these elite Fed guys more than doubled their 2023 US GDP-growth outlook to 2.1%. With the economy strong, their expected unemployment rate this year retreated from 4.1% to 3.8%. They even saw core PCE inflation excluding energy and food moderating from 3.9% to 3.7%!
With continuing disinflation forecast despite a stronger US economy, you’d think top Fed officials would soften their uber-hawkish stance. They could project fewer additional rate hikes, or not holding the FFR as high for as long. But they did neither, with the 2023-year-end FFR forecast staying at the prior dot plot’s 5.63%. The FOMC views the FFR as a 25-basis-point target range, so dots are the midpoint average.
That implied one more 25bp hike later this year, at either the early-November or mid-December FOMC meetings. Traders had long expected that, since the mid-June dot plot also showed a 5.63% FFR exiting 2023. Traders weren’t looking for more-hawkish dots, as the USDX slumped 0.4% that day leading into that latest SEP. Gold really outperformed, with nice 0.8% intraday gains to $1,947 before that FOMC decision.
But despite no rate hike and no change to year-end-2023 projected FFR levels, Fed officials still managed to pull a hawkish rabbit out of their hats. Their year-end-2024 FFR forecast surged 50bp from 4.63% in mid-June to 5.13% this week! So the previous 100bp of rate cuts implied next year were slashed in half to 50bp. I didn’t expect that to change at all, though consensus was for trimming one of those cuts to 75bp.
As far as dot-plot surprises go, that was fairly mild. Top Fed officials’ FFR projections have long been notorious for proving wrong, as the Fed chair himself often emphasizes in his post-FOMC-meeting press conferences. So depending on the tenor of major economic data like jobs, GDP, and inflation during the coming few months, the next dot plot in mid-December will likely change again. Projections are always in flux.
There are many examples of dots being far from subsequent reality. A recent one is the mid-March-2022 SEP accompanying the Fed’s maiden rate-hike of this cycle. Then top Fed officials expected to see the FFR leave 2022 and 2023 at 1.88% and 2.88%. Yet merely nine months later the federal-funds rate was actually running far higher at 4.38% leaving last year, and is again just 25bp away from 5.63% exiting 2023!
So the currency and gold-futures speculators who closely watch the dots should know better than to put too much stock in them. They’ll look different next quarter and continue to greatly diverge from the actual FFR trajectory like usual. Yet starting with Wednesday’s SEP, sizable US-dollar buying erupted fueling gold-futures selling. The USDX reversed sharply, staging a 0.7% intraday surge into a new rally closing high.
So gold dropped from $1,947 leading into the FOMC to a flat close of $1,931. That still wasn’t bad, much better than other gold plunges after other FOMC hawkish surprises in the past 18 months or so. Gold weathered Fed officials implying higher-for-longer with half the previously-projected rate cuts in 2024 well. And gold-stock traders didn’t freak out, with the leading GDX gold-stock ETF climbing 1.1% to $29.71 that day.
The USDX’s post-dots reversal extended its relentless gains since mid-July to 5.7%, which is gigantic for a major world currency! Yet gold continued to overcome the dollar as it only slumped 1.5% in that same span. Gold shows relative strength when falling less than the dollar surges during its material rallies. Often post-FOMC price trends aren’t apparent until the following day, after foreign traders have a chance to react.
Both gold and GDX were weaker Thursday morning as I penned this essay, dragged down by stock markets falling on higher-for-longer fears. But again those latest dots shouldn’t be taken too seriously. All it will take for top Fed officials to pencil in more rate cuts in 2024 is weaker-than-expected jobs reports or cooler-than-expected inflation ones. We should see some before mid-December, pushing the dots back lower.
No matter what the Fed did this week, gold wasn’t likely to plunge because speculators’ gold-futures positioning remained quite bearish. This chart is updated from my gold-shorting-spike-bullish analysis as September dawned. Total spec longs remained relatively-low while total spec shorts stayed relatively-high leading into this latest FOMC meeting, leaving way more room for gold-boosting buying than selling.
The weekly Commitments of Traders reports current to Tuesday closes aren’t released until late Friday afternoons. So the latest data before this essay was published was current to Tuesday the 12th, a week before the FOMC. Then total spec longs and shorts were running 282.4k and 137.6k contracts, leaving massive room to buy back futures. Those bearish collective bets were bullish for gold on mean-reversion buying.
The first month of the USDX’s recent big surge into mid-August shook loose huge gold-futures shorting. That left total spec shorts at their highest levels since early November 2022, early in this large 26.3% gold upleg’s life. Excessive shorts guarantee proportional near-future buying to cover and close those risky leveraged downside bets on gold. Spec shorts averaged 94.1k contracts from late March to early August.
To mean revert back down to those levels would require 43.5k contracts of short covering, the equivalent of 135.4 metric tons of gold. Had top Fed officials not changed their 2024 federal-funds-rate outlook this week, big gold-futures short covering likely would have ignited. That quickly becomes self-feeding, as the resulting surging gold prices pressure more shorts into buying offsetting contracts to close out their bets.
But since spec longs well outnumber spec shorts, they are proportionally more important for driving short-term gold trends. Over the past 52 CoT weeks, longs have run 2.4x shorts on average. Spec longs have a well-defined secular trading range, with lower support near last September’s 247.5k contracts that birthed this strong gold upleg. Upper resistance in recent years has run near 413.0k, implying buying exhaustion.
In that latest pre-FOMC CoT, total spec longs were running just over 1/5th up into that probable gold-upleg trading range. That left room for 4/5ths of potential buying, another 130.6k contracts equivalent to a massive 406.1t of gold! Along with likely short-covering buying that adds up to 541.5t, to easily catapult gold way higher. That buying will likely accelerate soon as the FOMC’s ability to hawkishly surprise vanishes.
Again the Fed has already hiked its FFR 525 basis points in the last 18 months or so. Fed officials still see another 25bp at best, before cuts later next year. So for all intents and purposes this monster rate-hike cycle is over, 19/20ths finished! Surprisingly-hot inflation reports could tease out the threat of more hikes, but they’re unlikely. These multi-decade FFR highs already risk destabilizing the US government.
This week its total national debt crossed $33,000b for the first time, a staggering record! Higher rates due to Fed rate hikes force the government to issue new Treasuries at higher yields, paying more interest. At the 0.13% FFR where this monster hiking cycle started, that makes for just $41b of interest annually. But at the current 5.38%, that skyrockets to $1,774b per year! That would be the single-largest expense by far.
That dwarfs the biggest spending category of social-security transfer payments at $1,240b, and defense at $736b. And the longer the Fed keeps the FFR high, the greater the likelihood the US economy rolls over into a serious recession. Top Fed officials sure don’t want to get blamed for that heading into a key election year. They have little hiking firepower left, so Fed-hawkish surprises will give way to Fed-dovish ones.
Those will hammer the still-too-high US Dollar Index, extending its mean-reversion bear. A weaker dollar will unleash that pent-up gold-futures buying, rekindling gold’s powerful upleg. Interestingly its technicals remain great despite recent months’ lingering pullback fueling bearish sentiment. Gold is climbing again, rallying off major support at its 200-day moving average. With some futures buying, it will be off to the races.
Gold’s stalled upleg reigniting will fuel big gains in the gold miners’ stocks. Since their earnings amplify gold price trends, the majors dominating GDX tend to leverage material gold moves by 2x to 3x. Like gold, GDX has suffered a considerable selloff in recent months. But this strong gold-stock upleg is still grinding higher on balance, ready to mean revert back up into its uptrend channel as gold prices recover.
Following gold, GDX also broke down below its uptrend’s support line on recent months’ massive US Dollar Index rally. But the major gold stocks’ 200dma failed, which would be ominous if they didn’t just mirror and amplify gold. Once the yellow metal turns decisively higher on that gold-futures buying, the gold stocks will follow leveraging that upside. Within a couple weeks, GDX will shoot back into its upleg’s uptrend.
When gold reverses out of mid-upleg pullbacks on gold-futures buying, the gold stocks just skyrocket. That last happened not long ago, when GDX soared 34.4% in just 1.2 months into mid-April! A similar mean-reversion surge from this leading gold-stock ETF’s latest interim low in mid-August would catapult it back up near $37. That would be way up into its uptrend channel, nearly challenging upper resistance.
Gold blasted 12.6% higher in that same late-February to mid-April timeframe on big gold-futures mean-reversion buying. So GDX leveraged its gains over 2.7x, making for a profitable ride. Another is coming on the same Fed-dovish dollar-hitting gold-futures-buying dynamic, likely soon. While gold and the miners are plagued with bearish sentiment now, that will dissipate fast as gold resumes powering higher again.
After this week’s Fed-hawkish-surprise 2024 dots, gold again closed at $1,931. That was 2.2% above its dollar-surge-fueled latest interim low of $1,889 in mid-August, before gold resumed overcoming the dollar. Few traders seem to realize gold’s nominal all-time-record closing high of $2,062 from early August 2020 is already within striking distance. Regaining it would merely require a total 9.2% mean-reversion rally.
That’s considerably smaller than its spring one following this upleg’s prior healthy pullback, which actually extended to 13.2% into early May. Once gold challenges then surpasses new nominal records, that changes everything for gold and gold stocks. Bullish financial-media gold coverage will explode, fueling widespread interest in chasing its gains! Capital inflows will soar as traders flock back, accelerating the upside.
Ever since this gold upleg was born a year ago, I’ve argued it should ultimately best 40%. Up 26.3% at best so far, it is already the biggest gold upleg by far since a pair of mighty 42.7% and 40.0% ones both peaking in 2020. 40% gains would carry gold way up near $2,275, way into new-record-high territory that would radically increase gold’s attractiveness to traders. GDX should rally 80% to 120%+ in that scenario.
Again at best its upleg had surged 63.9% in mid-April, but has slumped back to mere 35.8% gains as of mid-week. To hit 120%, GDX would have to soar over $48 which is another 62% higher from current levels! That’s a lot of potential upside, well worth positioning for. The fundamentally-superior smaller mid-tier and junior gold stocks we have long specialized in would see much-bigger gains than GDX like usual.
So anyone with a contrarian bone in their body should be salivating at this opportunity to buy gold stocks cheap before everything changes. The Fed is done or almost done hiking, so both the USDX and gold are due to mean revert sharply. Higher gold prices will fuel big gold-stock gains, particularly as traders start to focus on new record highs in gold. Great gold stocks could easily double or triple as this plays out!
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The bottom line is gold and its miners’ stocks just nicely weathered another hawkish FOMC surprise. Top Fed officials slashed their 2024 rate-cut outlook in half, extending the US dollar’s massive bear rally. Yet gold only retreated modestly, with speculators’ gold-futures positioning already quite bearish. Those gold-price-dominating traders have way more room to buy than sell, which is very bullish for gold and gold stocks.
With the FOMC effectively done hiking, hawkish surprises will soon give way to dovish ones. Traders will be looking for cuts, increasingly interpreting economic data as justifying them. That will hit the lofty US dollar, unleashing big gold-futures buying driving gold much higher. As gold stocks amplify its gains, sector excitement will mount with new record highs in sight. That will attract lots of capital, accelerating the upside.
Adam Hamilton, CPA
September 22, 2023
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