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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 Nears Potential Bull-Market Breakout

Gold

Gold surged sharply over this past week or so, nearing a major bull-market breakout! Nearly everyone was surprised by this violent awakening, 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 flown under 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 close to a major bull-market breakout. For several years now, gold has faced stiff resistance around $1350. It has repelled gold multiple times, looking like an impregnable Maginot Line.

But gold’s promising ascent was short-circuited from there, unleashing a disheartening slump over the next 10 weeks or so. By early May, gold had retreated 5.2% to $1271. The primary culprit was resurgent euphoria in the US stock markets. Equity exuberance has long proven gold’s mortal nemesis. When stock markets are high and expected to continue climbing on balance, gold investment demand often withers.

The recent gold action can’t be understood without the context of the US stock markets as represented by their flagship S&P 500 index (SPX). Heading into last September, the SPX was marching to a series of new all-time record highs. Since gold tends to climb when stock markets sell off, there was little demand for this essential portfolio diversifier. Why buy gold when stocks seem to do nothing but rally indefinitely?

That who-cares sentiment helped fuel all-time-record short selling in gold futures, hammering gold down to $1174 in mid-August for a 19.3-month low. Stuck in the shadows of euphoric stock markets, gold largely drifted sideways from there averaging $1197 until early October. But on October 10th, hyper-complacent stock traders were finally confronted with a serious selloff as the SPX plunged 3.3% that day alone.

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

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

That SPX selloff snowballed into a severe near-bear correction, down 19.8% by Christmas Eve. With the stock markets burning, investors remembered the timeless wisdom of prudently diversifying their stock-heavy portfolios with counter-moving gold. It had rallied 8.1% in 4.3 months by the time a super-oversold SPX was ready to bounce. That gold upleg kept growing, ultimately extending to 14.2% gains by mid-February.

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

By that point the SPX had regained nearly 3/4ths of its total correction losses, so exuberant-again traders started to forget gold. Gold investment 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 the end of April at another new all-time-record high. That extended its total monster-bounce rebound rally since late December to a colossal 25.3% in 4.2 months! A couple days later in early May with the SPX still near records, gold fell to that $1271 YTD low. Euphoric stock investors’ exodus from gold persisted another week, when GLD’s holdings slumped to 733.2t. That was down 11.0% in 3.3 months.

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

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

So once again just like in October the last time the SPX rolled over hard, gold caught a bid. It rallied back up to $1299 in mid-May as investors again remembered stock markets can also fall. GLD’s holdings began modestly recovering as stock-market capital started slowly migrating back into gold. But that nascent trend reversed again in mid-May as stock markets bounced sharply higher, unleashing surging euphoria. Related: What To Expect As Driving Season Kicks Off

The primary driver of gold in recent years has been stock-market fortunes. Gold often falls out of favor when stock markets are high and rallying, then starts returning to favor when they sell off again. In a very real sense gold is the anti-stock trade. While it doesn’t only climb when stock markets weaken, that’s what mainstream investors remember gold for. Its investment demand is rarely strong near stock-market highs.

So gold again slumped back near $1273 by late May as the SPX rebounded, further demoralizing the few remaining contrarians. This metal felt pretty hopeless heading into its summer doldrums, its weakest time of the year seasonally. Then a Trump bombshell shocked stock traders out of their complacency. He warned the US was levying escalating tariffs on all Mexican imports to force Mexico to fight illegal immigration!

Last Friday May 31st was the first trading day after that surprise, and the SPX fell 1.3% to its lowest close since its all-time-record peak a month earlier. That extended its total recent selloff to 6.6%, so worries mounted. Gold had closed at $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 gold closing 1.3% higher at $1305.

$1300 is a critical psychological line, heavily coloring sentiment especially among hyper-leveraged gold-futures speculators. They tend to buy aggressively when gold regains $1300 from below, and sell hard when gold breaks under $1300 from above. But while gold-futures trading heavily influences short-term gold price action, only sustained investment buying can ultimately grow gold uplegs to major status.

GLD’s holdings are the best daily proxy available of gold investment demand. And last Friday when gold surged, GLD merely saw a small 0.3% holdings build. American stock investors weren’t buying gold, it was the gold-futures speculators. These traders control far-less capital than investors, so their available buying firepower to push gold higher is limited. Gold uplegs never reach potential without investment demand.

The Asian markets were closed last Friday as gold rallied back over $1300 in the States. So when they opened again this past Monday June 3rd, Asian traders piled on to the gold buying. By the time the US stock markets neared opening that day, gold was already up to $1317 in overnight trading. Once again that global momentum carried into the US session, helping gold surge another 1.5% 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 long on gold-futures buying alone. But something big changed that day in the US markets. American stock traders, which had mostly shunned gold since late January, took notice. They started shifting capital back into gold via GLD shares in a major way, driving a huge 2.2% build in its holdings!

That was the biggest single-day percentage jump in this leading gold ETF’s holdings in 2.9 years, since early July 2016. That happened to be soon after the UK’s surprise pro-Brexit vote, when gold soared on the resulting uncertainty. While one day doesn’t make a trend, such a massive shift in gold investment buying is definitely attention-grabbing. If investors continue 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 $1350 resistance zone, but has a high base from which to launch an assault. If gold-investment demand persists, gold doesn’t have far to run to hit new bull-to-date highs. Of course further stock-market weakness on balance would greatly help, but it’s not necessary with new-high psychology.

(Click to enlarge)

Blinded by apathy, not many traders realize gold still remains in a secular bull market. It was born from deep 6.1-year secular lows in 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 crested at $1365 in early July 2016.

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

Gold plummeting in that election’s wake was the result of incredible euphoria, or Trumphoria at that time. Trump not only won the presidency, but Republicans controlled both chambers of Congress. So stock markets soared on hopes for big tax cuts soon. The SPX surged dramatically higher on truly-epic levels of euphoria, which in turn battered gold. Most investors shun gold when stock markets look awesome. Related: Amazon Set To Leave Many Of Its Long-Time Vendors

That greatly exacerbated gold’s normal correction to a monster 17.3% over 5.3 months! While very ugly and miserable, that remained shy 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 into early 2018, despite the SPX continuing to soar dramatically.

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

A few months later gold was 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 the SPX marched back up towards record highs after a sharp-yet-shallow-and-short 10.2% correction in early February 2018. Gold apathy and despair flared again.

But gold bottomed late last summer as extreme record gold-futures shorting exhausted itself, and started recovering higher again. That young upleg really accelerated when 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 entire chart pattern.

After a strong start hitting $1365 several summers ago, gold couldn’t punch through to new bull highs. It tried several times, but stock-market euphoria and heavy gold-futures selling on US-dollar strength kept batting it back down. Although gold couldn’t make new-high progress, it did carve a nice secular series of higher lows. While higher lows aren’t as exciting and attention-grabbing as higher highs, they are very bullish.

Flat highs combined with rising lows have created a gigantic ascending-triangle technical formation in gold over the past several years. That’s very clear above, gold coiling ever-tighter between climbing lower support and horizontal upper resistance. Ascending triangles are bullish chart patterns that are usually resolved with strong upside breakouts. Gold has spent recent years being accumulated behind the scenes.

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

Any close over that vexing 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 this essay, gold closed at $1331. That only left another 2.4% to climb to hit that decisive-breakout level. That’s trivial when investment capital is returning.

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

And once gold heads over its $1365 bull-to-date peak of July 2016, gold investment will start becoming popular again. Financial-media coverage will explode, and be overwhelmingly positive. Investors love chasing winners, and nothing motivates them to buy more than new bull-market highs. We’ve seen that in spades in the stock markets in recent years. Major buying from highs often becomes self-feeding.

The virtuous circle of inflows driven by new-high psychology can get very powerful. The more gold rallies, the more traders want to buy it to chase the momentum. The more they buy, the faster gold rallies. Gold hasn’t enjoyed positive capital-inflow dynamics like this since summer 2016. The potential gold upside from here as this unique investment returns to favor is big, supported by key tailwinds not enjoyed in years.

Starting from mid-August’s deep gold low, 20% and 30% total uplegs would catapult this metal way up to $1408 and $1526! Major new bull-market highs in 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 surging to more record highs, stock euphoria shouldn’t arise to retard gold’s ascent.

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

At the end of April at the 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 were only worth $30.8b at $1283. That implies American stock investors had a gold portfolio allocation around 0.12%, effectively nothing! Merely to boost that to even 0.5%, their gold holdings would have to quadruple. There’s vast potential for gold buying.

Another thing going in gold’s favor is the high US-dollar levels. Its leading benchmark the US Dollar Index hit 23.3-month highs in late April, then revisited those levels in late May. Gold-futures speculators tend to sell gold on a strengthening dollar and buy gold on a weakening dollar. The dollar is likely to drift lower in future months too, adding to gold’s momentum. The high dollar irks the Trump Administration, hurting US exports.

So gold is nearing a major bull-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 its miners. This chart shows the same gold-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.

(Click to enlarge)

This essay is focused on gold so I’ll discuss gold stocks in a future one. For our purposes today, note how GDX is positioning 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 essentially the first half of 2016, GDX amplified its gains with a monster 151.2% upleg!

So with gold on the verge of a major bull-market breakout, the beaten-down gold stocks are the place 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 with superior fundamentals. The kind of upside they can accrue during major gold uplegs is amazing, really multiplying wealth rapidly.

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

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

By Adam Hamilton

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