This secular gold bull’s latest upleg is strengthening, as traders gradually diversify into the yellow metal. Major bullish drivers are contributing to gold’s renaissance, led by the Fed’s epic money printing and the raging inflation it has unleashed. Weakening stock markets are also fueling mounting gold demand. This resulting gold upleg is powering higher on balance, albeit in volatile fashion due to gold-futures speculation.
Secular bull markets are an alternating series of uplegs followed by corrections, prices trending higher by taking two steps forward before one step back. Gold’s last near-correction-grade selloff bottomed back in late September at $1,725. That left the yellow metal very-oversold and mired deep in widespread bearish sentiment, a perfect breeding ground to spawn a major new upleg. And indeed an impressive one was born.
At best in early March, gold had surged 18.9% higher in just 5.3 months! Those gains mounted as gold’s big geopolitical spike in response to Russia invading Ukraine peaked. But still this week as that crisis is fading from headline financial news, gold remains up a strong 13.9% over 6.4 months. Nearly 3/4ths of this upleg’s gains are intact despite traders’ geopolitical fears waning! Gold’s bull market is alive and well.
This young upleg is the sixth of gold’s secular bull, and is already remarkable. Gold’s strengthening gains have accrued despite fierce headwinds from the relentless drumbeat of unbelievably-hawkish jawboning and actions from top Fed officials. While speculators dumped gold-futures contracts on many of those, gold quickly rebounded from the resulting selloffs. Gold’s fundamentals are strong to overcome those.
Back in late September, gold’s correction lows came a week after the Federal Open Market Committee pre-announced it would soon start slowing its epic money printing from its fourth quantitative-easing campaign. Then at the FOMC’s next meeting in early November, Fed officials decided to start that QE4 taper right away rather than wait until December like expected. Gold still surged after that policy decision.
Then in mid-December at the next FOMC meeting, the Fed doubled the pace of that QE4 taper to $30b per month. Even more hawkish, top Fed officials’ collective outlook for future federal-funds-rate hikes tripled from two total in 2022 and 2023 to fully six! That triggered a minor gold selloff, but the yellow metal kept generally grinding higher. Until that very FOMC meeting’s minutes were released in early January.
They heaped on another pile of hawkishness, revealing top officials were discussing an early balance-sheet runoff. So quantitative-tightening bond selling, effectively starting to destroy some of the vast QE4 money printed, was suddenly looming! At its next late-January meeting, the FOMC warned its first FFR hike was coming in mid-March. The Fed chair also said QT would arrive sooner and run faster than last time.
That QE4 turbo-taper finished in March, ending that monetary-deluge era. And the FOMC indeed hiked at its next meeting in the middle of that month, birthing its thirteenth rate-hike cycle since 1971. And the top Fed officials’ FFR outlook in that dot plot skyrocketed from three quarter-point hikes projected this year to a whopping seven total! Recent months have seen one of the Fed’s most-extreme hawkish pivots ever.
Any one of these FOMC revelations, and plenty of other lesser jawbonings from Fed officials, could have derailed gold’s young upleg. And all of them together probably should have, as speculators have a long history of fleeing gold futures on hawkish Fed surprises which hammers gold lower. Yet gold overcame this immense gold-futures-selling fodder to continue rallying on balance, even defying a surging US Dollar Index!
Again up 18.9% at best on that Russia-invading-Ukraine geopolitical spike, gold’s upleg remains smaller than average. Born back in mid-December 2015 as the FOMC started its previous rate-hike cycle, this secular gold bull has enjoyed five earlier uplegs which averaged big 29.3% absolute gains! If this latest sixth upleg merely lives up to that precedent, gold would surge to $2,231 before this run higher matures.
Yet this time around gold’s upside potential is much greater than normal, given the amazing fundamental backdrop the yellow metal enjoys. That includes this raging inflation unleashed by the Fed’s enormous QE4 money printing, and the mounting apparent bear market in bubble-valued stock markets. Yet most traders are overlooking their exceedingly-bullish implications for gold, partially blinded by recent price action.
As Russia invaded Ukraine in late February and soon after, gold sentiment was rapidly improving as this leading alternative asset surged higher in a massive geopolitical spike. In just seven trading days, gold rocketed up 8.6% to a $2,051 interim high! Excited traders understandably thought gold was off to the races, then were disappointed after it rapidly plunged symmetrically to that surge. That slammed sentiment.
Traders shouldn’t have been surprised when that geopolitical spike quickly collapsed, as that left gold very overbought and those are always short-lived. The very day gold peaked on March 8th, I warned our weekly-newsletter subscribers that “Unfortunately gold is getting overbought after such a big, fast run.” Thus “the odds for an imminent sharp rebalancing selloff” were soaring. That plunge should’ve been expected.
Gold prices have two primary drivers, investment demand and speculator gold-futures trading. While the former is ultimately far-larger and way-more-important for fueling secular gold bulls, the latter is much more potent for driving short-term volatility. While they command vastly-less capital firepower than gold investors, gold-futures speculators punch way above their weights in gold-price influence due to extreme leverage.
Each contract controls 100 troy ounces of gold, worth $196,500 this week. Yet traders are only required to maintain $7,200 cash margins in their accounts per contract. That enables leverage running as high as 27.3x! At those extreme levels, every dollar deployed in gold futures has 27x the gold-price impact as a dollar invested outright. Such huge leverage is crazy-risky, forcing a myopic ultra-short-term trading focus.
At 27.3x, gold-futures speculators can’t afford to be wrong on gold prices for long. A mere 3.7% gold move against their bets would wipe out 100% of their capital risked! So these traders live or die by piling onto gold’s immediate momentum. Their leveraged buying and selling really amplifies gold’s volatility, leaving messier trend channels in its wake. That’s what drove gold’s anomalous geopolitical spike and collapse.
This chart superimposes gold’s price action over the last couple years or so on speculators’ positioning in longs and shorts, upside and downside bets on gold prices. These totals are published weekly in the famous Commitments of Traders reports. Enormous leveraged gold-futures buying fueled gold’s ill-fated geopolitical spike, and massive gold-futures selling killed it. Neither affected gold’s underlying upleg uptrend.
Russia technically launched its Ukraine invasion overnight into February 22nd, moving “peacekeeping” forces into that country’s eastern separatist Donbas region. The broader national invasion came a couple days later overnight into the 24th. Even as little as a week before that formal invasion, most traders didn’t think Vladimir Putin would actually pull the trigger. Market action mostly assumed he was saber-rattling.
So as late as mid-February, Russia invading Ukraine wasn’t priced into most markets. Still at that point gold’s young upleg had already powered 8.5% higher over 4.5 months. Despite that relentless drumbeat of Fed uber-hawkishness, spec gold-futures buying played a major role. In that pre-invasion span, they sold 14.2k long contracts but bought to cover 35.5k short ones for gold-equivalent buying of 66.2 metric tons.
Identifiable gold investment demand in that early-upleg timeframe was way smaller than gold-futures buying. The leading proxy for global gold investment is the combined holdings of the dominant GLD SPDR Gold Shares and IAU iShares Gold Trust gold exchange-traded funds. Rising holdings reveal the vast pools of American stock-market capital migrating into gold. GLD+IAU holdings saw a 1.6% or 23.8t build then.
Geopolitical fears first really ignited gold on February 17th, when it blasted up 1.7% to $1,899. That came after the US secretary of state warned the United Nations Security Council that Russia was trying to fake a false-flag pretext to justify an invasion of Ukraine. So gold’s big distorting geopolitical spike ran from the prior day’s close to gold’s March 8th peak. Gold blasted 9.8% higher to $2,051 in that several-week span!
That was mostly fueled by speculators massively flooding into gold futures. They added an enormous 60.6k long contracts in that short period, which was slightly offset by another 7.4k of short selling. CoT weeks run between Tuesday closes, and any long or short trading over 20k contracts is huge. In the week ending February 22nd on that invasion scare and initial invasion, total spec longs skyrocketed 39.2k contracts!
All that added up to colossal gold-equivalent buying of 165.4t to fuel gold’s sharp geopolitical spike! With gold blasting higher and uncertainties exploding, gold investment demand also surged. But GLD+IAU holdings only saw a 3.7% or 55.6t build in that several-week span, just over a third the size of that giant gold-futures buying. That implies about 3/4ths of gold’s geopolitical spike was directly driven by futures.
But gold geopolitical spikes are always risky because they depend on headlines, which quickly change. Overnight heading into March 9th, speculators overextended with gold-futures longs had to start dumping them after hopeful comments from Ukraine’s government fanned peace-talks hope. Like usual in hyper-leveraged gold futures, that selling cascaded ultimately hammering gold 2.9% lower to $1,992 that day!
That Russia-invading-Ukraine geopolitical spike was already failing as rapidly as it had surged, despite that war still intensifying. Over the next week, gold collapsed 6.6% to $1,916. Heavy gold-futures selling was to blame as speculators rapidly unwound their excessively-bullish bets. Specs dumped 19.5k longs, but that was about half offset by 10.0k of short-covering buying. That netted out to a gold-equivalent 29.6t.
Since those CoT reports are only released weekly, their resolution is low for fast gold moves. In the following CoT week, specs dumped gold futures for another 49.3t in gold-equivalent terms. That geopolitical spike driven by huge gold-futures buying collapsed on major gold-futures selling. Gold’s sharp drop didn’t faze investors though, as GLD+IAU holdings still edged up 0.1% or 1.5t in that span where gold fell 6.6%.
The important takeaway here is gold’s young upleg was well-established before Russia invading Ukraine spawned that few weeks of furious buying! That geopolitical spike catapulted gold above its uptrend resistance, accelerating upleg gains. But the subsequent inevitable failure of that headline-news-driven gold-buying frenzy merely forced gold back to uptrend resistance, staying above this metal’s 50-day moving average.
Gold’s fast geopolitical spike and its symmetrical failure were a futures-driven anomaly, a distraction from this bull’s strengthening sixth upleg. The gold-futures selling collapsing that spike dragged spec longs back down to the lower third of their gold-bull uptrend, leaving lots of room for these traders to buy back in and push gold higher. Spec shorts are high in their gold-bull downtrend, so short-covering buying is also likely.
While most traders perceive lower post-spike gold prices as weakness, gold has actually proven strong consolidating relatively-high before resuming rallying in this past week. Gold’s upleg is again running a healthy 13.9% over 6.4 months as of mid-week. That has mostly been fueled by speculators buying 37.7k long contracts and buying to cover another 50.9k short ones. That is 275.6t of gold-equivalent buying!
But the far-more-durable and important gold investment demand has been a big driver of gold’s strength too. The identifiable component of that in GLD+IAU holdings surged 8.1% or 121.1t in that whole-upleg span since late September! While investors love flocking back to gold to chase upside momentum, the yellow metal’s underlying fundamental backdrop is one of the most-bullish ever witnessed in our lifetimes.
The Federal Reserve panicked during March 2020’s pandemic-lockdown stock panic, slashing the FFR to zero and radically accelerating QE4 to wildly-unprecedented monstrous proportions. Between then and late March 2022, the Fed ballooned its balance sheet an insane 115.5% or $4,804b! Effectively more than doubling the US-dollar supply in just 24.9 months is why red-hot inflation is now raging out of control.
Relatively-more money competing for relatively-less goods and services relentlessly bids up their prices. Everyone running households or businesses knows actual inflation is much worse than the government reads suggest. Even the latest intentionally-lowballed headline Consumer Price Index print this week showed prices soaring 8.5% year-over-year! That’s the fastest seen since all the way back in December 1981.
The Fed can’t slay this disastrous inflation it unleashed unless it both hikes its FFR well above headline inflation rates and reverses a sizable-to-large fraction of that epic QE4 money printing with QT. Despite all the tough hawkish talk by top Fed officials since September, actually accomplishing either is highly-unlikely. A double-digit FFR or half-QE4 unwind would crush today’s QE4-levitated bubble-valued stock markets.
Just like the last time the Fed attempted QT after QE3, it will likely cave on tightening once the US stock markets fall significantly into bear-market territory. The resulting negative wealth effect would trigger a severe recession if not a full-blown depression, which Fed officials won’t risk. So with all proposed rate hikes and QT wildly-insufficient to stuff this monetary-deluge genie back in its bottle, high inflation will persist.
The only comparable inflation super-spikes in modern history came in the mid-1970s and late-1970s. There is nothing more potent for fueling big gold investment demand than festering inflation eroding away purchasing power. Gold prices nearly tripled during the 1970s’ first inflation super-spike then more than quadrupled during the second! Today’s secular gold bull will almost certainly power way higher in current inflation.
The Fed had to resort to extreme measures to slay those earlier inflation super-spikes, hiking its FFR to stellar average levels of 8.7% and 17.2% in the peak-CPI-inflation months of December 1974 and March 1980! Today the most-hawkish top Fed officials are merely talking about a 3.5% federal-funds rate to fight 8.5% CPI inflation. FFR levels have to exceed headline inflation rates, which would crush the US economy.
And contrary to gold-futures speculators’ irrational paranoia on Fed tightenings, Fed-rate-hike cycles have actually proven very bullish for gold historically. There have been fully twelve since 1971 before today’s latest one. Gold averaged strong 29.2% gains across the exact spans of all dozen. In the eight of those where gold rallied, its average gains soared to 49.0%! In the other four, gold averaged mild 10.5% losses.
Gold performed best during Fed-rate-hike cycles when it entered them relatively-low and they unfolded gradually. In mid-March as the FOMC kicked off its thirteenth rate-hike cycle, $1,916 gold remained 7.1% under its $2,062 bull-to-date peak from early August 2020 19.3 months earlier. And as Fed rate hikes hit bubble-valued stock markets, the FOMC is unlikely to hike more than once per regularly-scheduled meeting.
The main reason gold thrives in Fed-rate-hike cycles is they are so bearish for stock markets. Weaker stock prices encourage investors to prudently diversify their stock-heavy portfolios with counter-moving gold. With the worst inflationary backdrop since the 1970s, gold investment demand should dramatically grow in coming years. With the lion’s share of this secular gold bull still ahead, today’s upleg has great potential.
The biggest beneficiaries of higher gold prices are the gold miners’ stocks. As their earnings amplify gold prices, they are enjoying their own mounting upleg. The leading GDX gold-stock ETF has surged 37.7% since late September, paralleling gold’s 13.9% upleg gain! That is making for 2.7x upside leverage, on the higher side of the usual 2x-to-3x range. And GDX is dominated by major gold miners, which underperform.
Fundamentally-superior mid-tier and junior gold miners achieve much-better gains during gold uplegs than the majors! They are better able to consistently grow their gold production from smaller bases, while their lower-market-capitalization stocks are easier to bid higher. Our specialty at Zeal is researching this universe to uncover the best gold stocks and silver stocks to trade to multiply wealth during secular gold bulls.
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The bottom line is this gold bull’s underway sixth upleg is still strengthening. It has impressively powered higher on balance since last autumn, through one of the most-hawkish Fed pivots on record. This strong gold uptrend was well-established before gold’s recent Russia-invading-Ukraine geopolitical spike flared then collapsed. Gold consolidated higher in that aftermath, further cementing this upleg’s progress and potential.
Gold investment demand is growing in the biggest inflation super-spike since the 1970s. While top Fed officials are aggressively jawboning on fighting that, their implied coming rate hikes and QT remain way too small. So raging inflation will continue to fester while Fed tightening crushes bubble-valued US stock markets. This powerfully-bullish backdrop will drive gold much higher, catapulting gold stocks to huge gains.
Adam Hamilton, CPA
April 14, 2022
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