The gold miners’ stocks continue to vex contrarian traders, toying with herd psychology. They blasted higher to a key technical breakout in early November, building bullishness. But that was soon dashed on the rocks as they plunged into late November, fueling bearishness. While such schizophrenic action seems capricious, it is all driven by how gold-futures speculators are trading to bully around the yellow metal.
Gold miners’ earnings amplify changing gold prices, making their stocks leveraged plays on the metal they produce. That leaves gold stocks overwhelmingly-dependent on gold’s fortunes. Traders flock into this little high-potential sector when they expect higher gold prices. That bullish psychology comes from upside momentum in this leading alternative investment. When gold is climbing, traders want to own its miners.
But the other side of that sentiment coin is traders flee gold stocks when gold weakens. The more they fall, the more they are shunned. Gold stocks are forever slaved to gold, exaggerating its price trends. So gaming gold miners requires understanding what is moving gold and why. Investment capital flows are its dominant primary driver. But when investors are sitting on the sidelines, gold-futures speculators take over.
While these futures specs command vastly less capital than the investors, they punch way above their weights in gold-price impact. That’s mostly due to the extreme leverage inherent in futures trading. Each gold-futures contract controls 100 troy ounces of the yellow metal, worth $180,000 at $1,800 gold. Yet this week traders are merely required to keep cash margins in their accounts of $7,500 per contract.
That enables them to run maximum leverage of 24.0x, which is actually on the lighter side historically! Still that greatly amplifies the influence of gold-futures trading on gold prices. Each dollar deployed at that limit has 24x the price impact on gold as a dollar invested outright! Adding to futures’ big influence over gold, its world reference price is that gold-futures-trading-driven one. That really affects popular psychology.
Gold stocks’ wild ride in recent months was almost entirely driven by gold-futures trading blowing gold to and fro. This high-potential sector is almost untradable if you aren’t watching specs’ gold-futures action! That is what moves gold prices when investors are missing in action. And gold stocks simply amplify the prevailing trends in the metal they mine. So spec gold-futures trading is often the key to gold-stock fortunes.
The leading gold-stock benchmark and trading vehicle remains the GDX VanEck Gold Miners ETF. It contains the world’s biggest gold miners, which recently finished reporting good Q3’21 operational and financial results. GDX has certainly had a wild ride in the last several months, all attributable to how spec gold-futures trading was affecting gold. Understanding those trends is essential to gaming coming action.
GDX fell sharply in September before rebounding strongly in October. Then in November it surged again before collapsing! Those were big moves that really altered herd psychology. But it is always important to consider the recent price action that dominates popular greed and fear in broader perspective. As this chart shows, the gold-stocks have resumed grinding higher on balance after suffering a major correction.
Price trends are best-understood by analyzing the news and events driving them in chronological order. I’ve long framed the analyses in our popular newsletters on the skeletons of how things unfolded. Event A leads to B leads to C leads to D. If you don’t understand A, B, and C, you’re going to have a tough time anticipating D. The seeds for recent months’ gold-stock action started to be sown in a mid-summer gold plunge.
Since my past essays have covered gold-futures speculators’ anticipatory QE4-taper tantrum extensively, we’re going to start at the tail end of it today. GDX was recovering in early September, rallying back to $33.29 which was right near its key 50-day moving average. Things were looking up in gold-stock land after a rough summer. But gold selling flared again after a big US retail-sales beat was considered Fed-hawkish.
Over the next few weeks into late September, gold plunged 5.6% to $1,725. The driver was heavy gold-futures selling on Fed-tightening expectations, which fueled a parallel major 2.5% surge in the US Dollar Index. Gold-futures speculators often watch the dollar for trading cues. The extreme leverage they run necessitates a myopic short-term focus. At 24x, a mere 4.2% adverse gold move wipes out 100% of capital risked!
Unfortunately spec gold-futures positioning is low-resolution data only published weekly. The numbers from the famous Commitments of Traders reports only show Tuesday closes. So gold-futures action has to be matched to the nearest Tuesdays around gold-price swings. Over the closest several CoT weeks, the gold-futures speculators sold 16.6k long contracts while catapulting up their short-sold ones a big 29.1k!
That added up to the equivalent of 142.0 metric tons of gold selling. For comparison, the leading daily proxy for gold-investment capital flows is the combined bullion holdings of the dominant GLD and IAU gold ETFs. During that same September span, they only contracted a tiny 5.6t. So that gold-futures selling forced gold 5.6% lower, which GDX leveraged by 2.4x to an ugly 13.2% loss during that same span.
That was right in the middle of GDX’s normal range for amplifying material gold-prices moves of 2x to 3x. Gold finally bottomed then reversed sharply higher again in late September soon after the Fed declared its QE4 taper was imminent. When gold didn’t crater in the wake of late-September’s FOMC meeting, gold-futures speculators realized their taper-tantrum selling had already happened in preceding months.
Obviously in hindsight that major reversal was a great time to buy gold stocks. But realize virtually no one thought so then, as herd sentiment was overwhelmingly-bearish. As humans we naturally tend to overweight recent events psychologically, extrapolating them continuing to run indefinitely. Succumbing to that instinctive behavior makes it impossible to buy low then sell high, so it must be surmounted with perspective.
This comes from understanding that chronological chain of market events, the endless interplaying of causes and effects. Gold stocks mirror and amplify gold, which is driven by hyper-leveraged gold-futures trading if investors aren’t playing. The gold-futures guys in turn closely watch the US dollar’s fortunes and what the Fed is likely to do next. All that often overrides gold miners’ fundamentals, they don’t trade in a vacuum.
The contrarian traders who deployed in gold stocks in late September when they were deeply out of favor were soon rewarded for their courage. Over the next four weeks or so into late October, GDX surged to a 15.7% mean-reversion rebound. Gold’s own 4.7% bounce in that span so encouraged gold-stock traders that GDX amplified gold’s move by a great 3.3x! Gold was powering higher again on big gold-futures buying.
In the four-Cot-week span matching that gold rally, speculators bought 22.7k long contracts while buying to cover another 26.8k short ones. That added up to the equivalent of 154.0t of gold buying, a lot in such a brief period of time! The Fed-tightening-goosed USDX weakened 0.6% during that span, emboldening the gold-futures specs. Investors didn’t help, actually selling a bit with GLD+IAU holdings slumping 14.6t.
All gold-stock uplegs flow and ebb, taking two steps forward before retreating one step back. A pullback emerged in late October, when GDX plunged 5.7% in just over a week. Gold-stock traders were spooked by a much-milder 1.0% gold pullback, which GDX was amplifying an extreme 5.7x! Gold’s rebound took a pause because speculators’ gold-futures buying did. Their buying and selling netted out to nothing that week.
They sold a modest 4.3k longs, which were fully offset by 4.5k of short-covering buying. That added up to the equivalent of just +0.7t, essentially zero. GLD+IAU holdings didn’t budge either, edging up a trivial 0.3t during that CoT week. Without any identifiable buying, gold’s young upleg faltered. That sapped GDX’s strong upside momentum, forcing a sharp pullback. Not surprisingly the USDX was 0.3% stronger that week.
But gold-futures buying soon reignited with a vengeance, mostly on momentum-chasing. At 10x or 20x leverage, every one percent gold rises drives massive 10% or 20% amplified gains. Rather ironically the catalytic event was that early-November FOMC meeting where the Fed finally formally announced QE4 tapering was starting. The same speculators who feared that for months rushed back into gold futures!
After gold once again didn’t collapse on the Fed merely slowing its epic money-supply growth, buyers flooded in. Over the next week-and-a-half or so, gold blasted 5.3% higher to $1,866. That was back up to mid-June levels before an FOMC meeting implying distant-future rate hikes kicked off the summer gold selloff. That early-November gold resurgence shot GDX 10.7% higher in a slightly-offset span, for 2.0x leverage.
Yet again this was all driven by spec gold-futures buying, which proved utterly-enormous. During that two-CoT-week span closely matching gold’s mid-November surge, speculators added a colossal 55.6k long contracts! Anything over 20k in a single CoT week is huge, and those two ran +34.2k and +21.4k. That was partially offset by 7.9k of new shorting. That netted to the equivalent of another 148.2t of gold buying.
Interestingly the US Dollar Index surged 1.3% during this latest gold-rally span. Specs were so caught up in chasing gold’s upside momentum that they ignored the dollar strength! But unfortunately gold still hadn’t climbed high enough for long enough to convince investors to return. GLD+IAU holdings slipped a slight 3.5t during that span. Major gold uplegs are three-stage affairs, and the third stage wasn’t kicking in.
Normally gold uplegs are born in deep oversold lows when gold-futures specs buy to cover their profitable short contracts. Gold surges on that, forcing other shorts to quickly cover or face catastrophic leveraged losses. Those sharp gains soon convince other speculators to ride gold’s newfound upside momentum by buying leveraged longs. But that stage-one short covering and stage-two long buying are just triggers.
While the gold-futures speculators wield outsized influence on gold prices, their capital is very finite. It is investment flows that fuel major gold uplegs. But they only ignite if that initial futures buying drives sufficiently-big and persisting gains to look sustainable. Only then will this crucial stage-three investment buying take the baton. That can run for many months or years, unlike futures buying which quickly peters out.
The reason gold peaked in mid-November is spec long buying had largely exhausted itself. Total spec longs soared to a 20.5-month high of 412.6k contracts! They could’ve forged higher still, since their gold-bull uptrend resistance is way up over 500k. But anything over 400k forms a selling overhang, like those heavy windblown-snow cornices hanging off mountain peaks. The right catalyst can unleash selling anytime.
And that came early on Thanksgiving week, when expected news somehow triggered cascading gold-futures selling. With investors still on the sidelines, all that mattered was spec gold-futures trading. Gold plunged 2.3% the day Biden announced he would renominate Jerome Powell as Fed chair. Even though that was widely forecast, he was the less-dovish choice. So that triggered massive gold-futures selling.
During the CoT week straddling that ugly gold down day, specs dumped a colossal 30.8k longs which was about a third offset by buying to cover 11.1k shorts. Together that added up to the equivalent of 61.3t of gold selling. Investors didn’t flee in sympathy, forcing an impressive contrary 16.4t build in GLD+IAU holdings in that CoT week. That gold-futures puking got the downside-momentum flywheel spinning.
The 0.6%-stronger USDX didn’t help, exacerbating the necessary rebalancing selling in gold futures after upside bets got overextended. So from mid-November to the middle of this week, GDX plunged a rather-sharp 11.6% on a 4.4% gold drop. That was 2.7x downside leverage to gold, the higher side of normal. That just slammed GDX back below its 50dma, unwinding the earlier breakouts above there and its 200dma.
All this recent exciting-and-frustrating gold-stock price action, GDX surging then retreating then surging again then plunging, resulted from speculators’ gold-futures trading. That’s why this is super-important for all gold-stock speculators and investors to closely follow. The new CoT report current to this Tuesday will be published late Friday afternoon like usual. And it should help reveal whether this selling is likely over or not.
Just like specs’ gold-futures-buying firepower is limited by their finite capital, so is their selling. If these hyper-leveraged traders have dumped enough longs and added enough shorts in recent weeks, then gold and thus gold stocks are bottoming. They will again reverse sharply higher when some catalyst reignites gold-futures buying. Specs’ collective futures trading is like a giant pendulum swinging from extreme to extreme.
Gold-stock fortunes are again slaved to gold, which is again in turn driven by speculators’ gold-futures trading if investors aren’t active. The extreme leverage those specs run forces them to be exceedingly-myopic, hanging on every word of Fedspeak and closely watching the US dollar’s related spasmings. Successfully trading gold stocks requires observing all that, understanding it as a coherent chronological whole.
So watching these key gold-stock drivers and weaving them all together is the core focus of our popular newsletters. Every week and month I analyze speculators’ latest gold-futures positioning per those CoT reports, and what their trends likely portend. I closely track identifiable gold-investment capital flows in those monster gold ETFs, explaining them on a daily basis. All gold-moving news and events are analyzed.
Every significant swing in this multi-year GDX chart can be explained by gold price action driven by either spec gold-futures trading or gold-investment capital flows via GLD and IAU. How long their trends have been running, and the more or less overextended they are, help game major tradable turning points like correction bottomings and upleg toppings. That knowledge is necessary to fight the herd to buy low then sell high.
If you regularly enjoy my essays, please support our hard work! For decades we’ve published popular weekly and monthly newsletters focused 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 integrated contrarian approach has proven very successful. All 1,247 newsletter stock trades realized since 2001 averaged outstanding +21.3% annualized gains! Today our trading books are full of great fundamentally-superior mid-tier and junior gold, silver, and bitcoin miners to ride their uplegs. This week their unrealized gains were already running as high as +73.7%. Subscribe today and get smarter and richer!
The bottom line is gold-stock fortunes are heavily dependent on speculators’ gold-futures trading. The extreme leverage in that really bullies around gold prices, which miners’ stocks then amplify. So gaming gold-stock trends requires closely watching spec gold-futures positioning and what is motivating those traders to buy and sell. All that must be expertly integrated into a coherent chronological running analysis.
Gold stocks surged higher in recent months fueled by huge gold-futures buying. But when those upside bets on gold grew excessive, heavy selling soon erupted to rebalance overall spec positioning. That is what hammered gold stocks back lower in recent weeks. But speculators’ gold-futures-selling firepower is very finite just like their buying. The next couple CoT reports will offer key insights on whether it is exhausting.
Adam Hamilton, CPA
December 3, 2021
Copyright 2000 - 2021 Zeal LLC (www.ZealLLC.com)