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Gold Upleg Momentum Building

Adam Hamilton
Apr 21, 2017

Gold's young upleg just enjoyed a major upside breakout, bolstering strong technicals and heralding a coming Golden Cross buy signal. Investors have started aggressively buying gold again after record-high stock markets distracted them. This gold upleg's upside momentum is really building, portending accelerating gains in coming months. Yet sentiment remains poor, with traders still quite bearish on gold.

Virtually no one is excited about gold these days. Mainstream investors continue to ignore it like usual, while contrarians largely expect a lackluster sideways grind at best. This apathy is the natural result of gold's recent consolidation between late February and mid-April. With 6+ weeks seeing no net progress, there was little to spark any enthusiasm. Thus gold gradually faded from speculators' and investors' radars.

That's exactly why consolidations and corrections exist, to rebalance sentiment. At preceding interim highs, greed grows too intense to be sustainable. So subsequent drifts or selloffs bleed off this greed, replacing it with apathy or fear. That forces out most marginal traders, paving the way for the next major rally higher. That looks to have started just over a week ago in gold, as evidenced by multiple indicators.

Gold just surged to a major technical breakout above its key 200-day moving average, which greatly strengthens its latest uptrend. Technically-oriented traders carefully watch price action relative to this most important of moving averages. 200dma breakouts following correction-magnitude selloffs are powerful buy signals. So funds have already started moving serious capital back into gold since that breakout.

Gold's technicals and fundamentals are both very bullish, contrary to the lingering bearish sentiment still dogging this metal. Let's start on the price-action side, since that is kindling investment demand. This first chart simply looks at gold along with its key moving averages during its young bull market birthed near the end of 2015. Gold is now in this bull's second major upleg, and momentum is really building.

The day after the Fed's first rate hike in 9.5 years in mid-December 2015, gold plunged to a brutal 6.1-year secular low. Everyone thought gold was doomed, convinced a zero-yielding asset simply couldn't compete in a higher-rate environment. Yet as I discussed a few trading days before that initial Fed rate hike, gold actually thrives in Fed-rate-hike cycles historically! Gold's young bull since again proves this out.

Gold started surging in mid-January 2016 as the US stock markets rolled over into their worst selloff in 4.4 years, a mere 13.3% correction in benchmark S&P 500 terms. Then in early February gold broke above its 200dma decisively, like it just did again in April 2017. That critical technical breakout sparked major buying by speculators and investors alike, catapulting gold across that formal +20% new-bull threshold.

That first major upleg of gold's new bull had ups and downs, like all bull-market uplegs. A hawkish Fed crushed gold last May, but then a major miss on monthly US jobs followed by the UK's surprise pro-Brexit vote blasted gold back up. Ultimately this metal surged 29.9% higher in just 6.7 months after being left for dead right after the rate hikes started! But that left it very overbought, drenched in greedy sentiment.

As I warned last July right after gold peaked, it faced an ominous record selling overhang from the gold-futures speculators who dominate its short-term price action. That portended a high consolidation at best or correction at worst. These both accomplish the same mission of restoring sentiment balance, but in different ways. Consolidations bleed away greed more slowly with less pain, corrections do it hard and fast.

For several months last summer the easier high consolidation came to pass, with gold drifting sideways from its uptrend's resistance to support. But futures speculators were still excessively long using their usual hyper-leveraged bets. So when gold threatened to break below key $1300 consolidation support, the futures stop losses started tripping. That triggered more, igniting a cascading selling futures mass stopping.

That rare event hammered gold back down to its 200-day moving average for the first time since just after this new bull was born. 200dmas are the strongest and most-important support lines within ongoing bull markets, high-probability-for-success times to buy following normal healthy corrections. So gold caught a bid and surged again into early November, starting its next upleg. All this was typical bull-market behavior.

The Friday before the election, gold was back near $1305 on mounting odds Trump's chances of beating Clinton were growing. But the following Sunday, the FBI cleared Clinton a second time on her classified e-mails. So gold plunged the Monday immediately before Election Day. For months gold had traded as if a surprise Trump win would be bullish for it and bearish for general stocks, due to soaring uncertainty.

Gold closed right at its 200dma on Election Day, and gold futures rocketed 4.8% higher that evening as Trump began taking the lead as votes were counted. But stock markets started surging on big-tax-cuts-soon hopes instead of plunging as feared on a Trump win. So demand for gold, a unique asset tending to move counter to stock markets, withered. The Thursday after the election, gold plunged through its 200dma.

That was a decisive breakdown, defined as 1%+ beyond a key technical level. Traders view 200dmas as critical demarcations between bulls and bears. Bulls are healthy as long as prices remain above their own 200dmas. But once that strong bull-market support fails, all bets are off. It impairs the assumption that a bull actually still remains in force. So technically-oriented traders start unwinding their long positions.

Thus gold plunged sharply in mid-November following that 200dma breakdown. That dragged gold's other main moving average lower, its 50dma. 50dmas provide strong support within bulls except during major corrections, when 200dmas take over. That plunging 50dma soon crossed below gold's 200dma in mid-November, triggering the infamous Death Cross. That's a powerful warning signal preceding new bear markets.

Major moving-average crossovers are particularly important for futures speculators, who dominate gold's short-term price action. These traders can run extreme leverage to gold prices approaching 30x, way over an order of magnitude greater than the 2x legal limit in the stock markets. So they can't afford to be wrong for long, or risk catastrophic losses. Thus 200dma breakdowns and death crosses are taken very seriously.

So the extraordinary mass exodus of speculators and investors from gold in the wake of those surprise election results continued. There was massive selling in both the gold futures favored by speculators and the leading GLD SPDR Gold Shares ETF favored by investors. It was an anomalous bloodbath, which ultimately climaxed in mid-December the day after the Fed hiked rates for the second time in 10.5 years.

That extreme post-election anomaly in gold was driven by a potent combination of failing technicalsand the stock markets surging to new record highs as Trumphoria reigned. But it wasn't able to force gold's young new bull back into bear-market territory, with a huge-but-not-bear-magnitude total correction of 17.3% over 5.3 months. Gold was again universally despised and left for dead, just like a year earlier.

Yet out of that very despair the second upleg of gold's young bull was born. Everyone susceptible to being scared into selling low in the election's wake had exited, leaving only buyers. Gold soon started surging sharply into the new year despite the stock markets still levitating on big-tax-cuts-soon hopes. By mid-January a new bull-upleg uptrend channel was forming. Gold's 50dma soon stabilized and turned north.

Gold powered higher into late February, nearly regaining its key 200dma lost a couple days after the election. But then something else super-unprecedented happened, fitting in these crazy times. Futures-implied rate-hike odds for the Fed's imminent mid-March meeting skyrocketed. They were just 22% on February 24th when gold closed near $1257, but quadrupled to 86% in just 6 trading days on hawkish Fed jawboning!

So gold-futures speculators fled for the hills on imminent-rate-hike fears, despite the fact gold has climbed an average of 26.9% during the exact spans of the previous 11 Fed-rate-hike cycles since 1971. The day before the Fed's March meeting when rate-hike odds hit 93%, gold slumped to $1198. That was just under its fast-rising 50dma, forming the lower support of gold's newest uptrend channel. Then the Fed hiked.

That was universally expected and fully priced in. But top Fed officials didn't raise their forecast for the total number of rate hikes in 2017, as gold-futures speculators had feared. So gold started surging within minutes of that third Fed rate hike confirming the Fed's 12th modern rate-hike cycle was underway. But as gold neared its 200dma again, it stalled. That key moving average also offers strong overhead resistance.

Just as prices knifing down through 200dmas from above are seen as likely signaling new bears, prices bursting through from below are seen as heralding new bulls. This isn't always true. Though close, gold didn't enter a new bear following its early-November 200dma breakdown. And since its young bull had never ended, it can't be starting a new bull now. Still, 200dma crossovers motivate traders to buy and sell en masse.

After spending over two weeks leading into early April stuck just under its 200dma, gold finally surged 1.5% on the 11th and broke through. Mounting geopolitical fears motivated both futures speculators and GLD-share investors to buy aggressively. That 200dma breakout was decisive, carrying gold more than 1% above its key moving average. And once that heavy perceived resistance yielded, gold buying accelerated.

Over the decades if not centuries, 200-day moving averages have become the most-important technical line followed universally by nearly all traders. This is essentially a 10-month moving average, long enough to distill down major trends while filtering out volatile daily and weekly price noise. Prices above 200dmas are seen as being in bull uptrends, which traders want to ride. So 200dma breakouts ignite big buying.

As gold showed in February 2016, that soon becomes self-fulfilling. The more capital pouring into gold, the faster its price is bid higher. The more gold's price rallies, the more it catches the attention of other speculators and investors who want to chase this momentum. So they too start buying in. The reason technical analysis works is because big traders move big capital based on long-proven-out price signals occurring.

So gold's newest decisive 200dma breakout last week is likely to prove as bullish as this bull's initial one from early last year. It changes the entire perceptionof gold, shifting collective sentiment from late-2016's watch-out-for-a-bear mode to a gold-is-heading-much-higher outlook. In markets buying begets buying, regardless of what first sparked that buying. Traders just love to chase winners, so momentum builds.

And that psychological impetus to redeploy in gold is likely to soon grow much stronger. Gold is nearing a fabled Golden Cross buy signal! That's when a 50dma crosses back above a 200dma from below. It's one of the best-known and strongest technical buy signals, universally seen as heralding the early days of new bull markets. In gold's case today, its nearing golden cross will prove its bull is very much alive and well.

The timing of this next golden cross depends on how fast gold keeps advancing and thus dragging its 50dma higher. Its 50dma could cross back over its 200dma within a couple weeks at best, or a couple months on the outside. Either way, that big technical event is going to really accelerate the shift in prevailing gold sentiment from bearish back to bullish. That will clear the way for much-larger capital inflows into gold.

So momentum is really building in this gold bull's young second upleg. Interestingly this is right in line with this metal's usual strong spring rally from mid-March to late May. After last year's 200dma breakout and golden cross confirmed the first new gold bull since 2011, the resulting momentum was so strong gold rallied right into early July before regrouping. Gold's technicals today are very bullish for the coming months.

The sentimental impact of this technical action has already been big enough to fuel big bullish changes in gold's fundamentals. It's not just futures speculators buying aggressively, but longer-term investors. This is very important for this gold upleg's longevity, as investment buying is far more resolute. Investors are holding gold for longer time horizons, usually with zero leverage. And they control huge sums of capital.

The readiest proxy for gold investment demand is the holdings of that leading American GLD gold ETF. Unlike global gold supply-and-demand statistics which are only compiled and published quarterly, this dominant gold ETF releases its holdings daily. So they are the highest-resolution read available of what is going on in gold investment in real-time. GLD has seen big capital inflows since gold's latest 200dma breakout.

GLD's mission is to mirror the gold price. But GLD shares have their own supply and demand totally independent from gold's. So GLD's price is constantly threatening to decouple from gold's. The only way to maintain tracking is for GLD's managers to shunt any excess buying or selling pressure on its shares directly into gold itself. Thus GLD's physical-gold-bullion holdings rise and fall with capital flows.

In the first half of 2016, stock investors were buying GLD shares far faster than gold itself was being bought. So GLD issued new shares to supply and offset this excess differential demand. The proceeds were then immediately plowed into gold, growing the bullion GLD holds in trust for its shareholders. So quite literally, GLD is a conduit for the vast pools of stock-market capital to flow into gold. That bids gold higher.

This chart notes the quarterly changes in gold's price and GLD's holdings, the latter in both percentage and tonnage terms. Gold surged in 2016's first couple quarters on stock-market capital flooding into GLD shares. Then gold stalled in Q3'16 because that differential GLD-share buying ceased. Then right after the election, heavy GLD-share differential selling emerged which drove gold sharply lower in Q4'16.

When stock investors dump GLD shares faster than gold is being sold, GLD prices face running away from gold to the downside. So that excess GLD-share supply must be sopped up. GLD's managers raise the capital to buy back these shares by selling physical gold bullion. That directly weighs on the world gold price. Amazingly, capital flows via the American GLD are one of gold's dominant primary drivers globally!

Realize gold is strong when investors are buying it via GLD, and weak when they are selling it through this same stock-market conduit. Following their post-election plunge, GLD's holdings stabilized in late January and started surging again in early February. Large funds were reestablishing gold positions. But once the general stock markets started powering higher again on Trump teasing tax cuts, that buying ceased.

After those promising builds, GLD suffered draws again in early March after Fed-rate-hike odds soared. But contrarian buying drove a modest holdings rebound leading into that rate hike. Then that fund buying petered out again as gold stalled under its 200dma. Differential GLD-share buying didn't resume until, you guessed it, gold's 200dma breakout last week! That convinced large investors gold's bull remains alive.

Since then, GLD has enjoyed big daily builds of 0.5%, 0.8% and even a monster 1.4% this Wednesday! The mounting technical momentum after that 200dma breakout is fueling real fundamental investment buying. Again the self-feeding psychology of rising prices argues this trend will only accelerate. The more American stock-market capital flows into gold bullion via GLD shares, the faster gold's price will climb.

The faster gold rallies, the more investors and speculators alike will want to buy it to ride the momentum. While these lofty Trumphoria-distorted stock markets continue to retard gold investment demand, the big 200dma breakout is starting to overcome that. And the nearing golden cross will further cement the shift back to bullish sentiment. This gold upleg is really set up to accelerate considerably in the coming months!

While this gold bull itself should continue to see nice gains, they will be dwarfed by those of the leading gold miners' stocks. The major gold miners tend to leverage gold's upside by 2x to 3x, reflecting the outsized impact of higher gold prices on operating profits. And smaller gold miners often amplify gold's upside even more. Gold's bull is fueling a parallel much-larger bull in gold stocks, greatly multiplying wealth.

During roughly the first half of last year when gold powered 30% higher, the leading gold-stock index actually rocketed up 182%! Gold stocks just staged a major breakout of their own, and their bull-market upside targets are vastly higher than today's levels. Sooner or later everyone will figure this out, and bid gold stocks radically higher. But for now they are flying under most radars, creating excellent buying opportunities.

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The bottom line is momentum is really building in this second upleg of gold's young bull market. Despite plenty of lingering bearishness, gold just achieved a major breakout back above its key 200-day moving average. This signaled to large technically-savvy traders that gold's bull is very much alive and well, so they are moving capital back in. This is evidenced by surging differential buying of GLD shares post-breakout.

The resulting higher gold prices are finally starting to shift gold sentiment back to bullish again. And as usual, that will become self-feeding. Speculators and investors alike love chasing winners, so buying begets buying. The more capital flows into gold, the higher its price climbs. The more gold rallies, the more traders want to buy it. This virtuous circle can run for months, gold's new 200dma breakout is only the start.


Apr 21, 2017
Adam Hamilton, CPA

Thoughts, comments, or flames? Fire away at zelotes@zealllc.com. Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

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