Every major gold upleg during the past couple decades was fueled by combinations of three sequential stages of buying from specific groups of traders. The first is speculators covering gold-futures shorts, the second is specs buying gold-futures longs, and the third is investors returning to chase gold’s resulting upside momentum as evident in major-gold-ETF holdings. But that model isn’t fully explaining today’s upleg!
Initially it played out according to script. Gold bottomed at $1,820 in early October after a gold-futures-shorting-driven violent breakdown. The very next morning I published an essay concluding “Their shorts in particular are likely challenging major secular highs, which are never sustainable for long. That guarantees huge mean-reversion short-covering buying is imminent, which will catapult gold sharply higher.”
That indeed came to pass, with gold surging 13.8% into early December to $2,071. That proved its first nominal record close in fully 3.3 years, likely to soon fuel frenzied momentum-chasing buying. Normal speculator stage-one and stage-two gold-futures buying drove that, which was massive during that span. Only released weekly, speculators’ aggregate gold-futures positioning data is current to Tuesday closes.
Over the eight Commitments of Traders weeks best matching gold’s initial surge, specs bought to cover 65.0k short contracts and added another 71.5k long ones. That’s equivalent to 424.6 metric tons of gold buying, a massive amount in a couple months! That averaged 17.1k contracts of spec buying per CoT week, which is very large. Specs’ perfectly-normal early-gold-upleg gold-futures buying is evident in this chart.
Gold’s sharp mean-reversion higher out of that oversold and unsustainable early-October low resulted from big spec gold-futures buying. Note that major reversal was first triggered then initially driven by huge stage-one short covering, the red spec-shorts line plunged! That propelled gold high enough for long enough to attract in stage-two long buyers, which is evident in the green spec-longs line soon surging too.
That was all totally normal, the same short-covering-then-long-buying dynamic that fuels most major gold uplegs. But just as gold was finally reclaiming record territory, that spec gold-futures buying was depleting. As this chart illustrates, both spec shorts and longs have secular trading ranges. The lower support zone for the former is around 95k contracts, while the upper resistance zone for the latter is near 415k.
Generally buying peters out around those levels, indicating speculators’ gold-futures buying firepower has been largely exhausted. There aren’t many traders willing to bear the extreme risks inherent in hyper-leveraged gold-futures trading, and the capital they control is relatively small in the grand scheme. So when this gold upleg was born, the distances between current positioning and these zones revealed likely buying.
Back in early October, speculators had probable room to buy to cover 79.4k shorts and add 150.2k longs before hitting 95k and 415k respectively. That added up to 229.6k or 714.0t. But by early December, all that buying had expended much of that upleg’s potential, with specs only having another 14.4k shorts and 78.7k longs left. That was 93.1k contracts or 289.4t, just 4/10ths of that initial buying firepower remaining.
With the majority of gold’s easy mean-reversion gains behind, speculators took a breather. Both longs and shorts mostly drifted sideways in December, so gold’s young upleg stalled out. Then during the first six weeks or so of 2024, selling returned as the US Dollar Index surged on waning Fed-rate-cut odds. By mid-February specs had short-sold 3.2k contracts while dumping 76.1k longs, forcing a mild 4.2% gold pullback.
That was normal gold-upleg behavior too, actually quite bullish reloading spec gold-futures longs for more buying! Those traders continued modestly selling into late February, yet gold still bounced on large short-covering buying slamming spec shorts back under their 95k support zone. But leveraged speculators rushed back into gold-futures longs with a vengeance as March dawned, after some surprising Fedspeak.
On March 1st gold blasted up 2.0% to $2,083, its first record close since late December! That morning a Fed governor said he wanted his central bank to monetize more short-term US Treasuries. While that probably just meant shifting existing allocations, traders interpreted it as hinting at new quantitative-easing money printing. That prompted specs to add an epic 55.0k long contracts during that straddling CoT week!
Anything over 20k in any single CoT week is huge, and that ranked as the fourth-biggest long buying on record out of all 1,134 CoT weeks since early 1999! Gold exited that maybe-QE-heralding CoT week at $2,129 on March 5th. Over the next CoT week, specs continued buying on balance adding another 22.1k longs offset by 10.6k of new short selling. That left gold at $2,156, with this mounting upleg still behaving normally.
While gold breaking out decisively above its secular resistance zone since mid-2020 near $2,050 was impressive, that price action wasn’t unusual. Gold’s 19.9% upleg over 5.2 months at that point was fully explainable by speculators’ gold-futures trading. Over the next couple CoT weeks into late March, specs again sat on their hands so gold drifted consolidating high. But then the extraordinary suddenly emerged.
Over three CoT weeks from March 26th to April 16th, gold rocketed 9.7% higher to $2,388! That was nearly 4/10ths of gold’s now 31.2% total upleg gains rapidly accruing in just 1/10th of that upleg’s span. But the thing transforming this exploding breakout surge into remarkable was gold’s normal drivers weren’t responsible. Two of these last three CoT weeks have been reported, with the third due out late Friday.
Those saw specs do small net buying of 7.4k contracts in the first, then tiny net selling of 1.1k during the second. Gold shouldn’t have moved much at all with so little gold-futures trading. Amazingly in the last four reported CoT weeks current to April 9th, total spec longs just edged up 0.3k while their shorts fell a small 6.0k. So there is absolutely no way gold should’ve soared 9.7% in that span, it shouldn’t be possible!
This stunning disconnect is very bullish on two fronts. First if the gold-futures speculators weren’t in the driver’s seat like usual, big demand is coming from other sources. Second since specs haven’t had to do the heavy lifting catapulting gold higher in recent weeks, their gold-futures positioning still remains quite bullish. At that latest CoT, they still had likely room to short cover 11.8k contracts and buy a large 83.6k longs.
That is 296.8t in gold-equivalent terms, again over 4/10ths of the initial buying firepower they had when this gold upleg was born at $1,820 in early October! That was even marginally higher than that room to buy had been in late December when gold was merely at $2,068. Specs resuming buying and eventually exhausting their probable buying will drive gold considerably higher still. That’s remarkable after a 31% upleg!
The great majority of the time, that spec gold-futures trading is gold’s dominant primary driver due to its extreme inherent leverage. Mid-week each 100-ounce contract controlled $237,200 worth of gold. Yet these traders are only required to maintain $9,400 of cash in their accounts per contract, making for crazy 25.2x maximum leverage! Way up there a mere 4.0% gold move against bets wipes out 100% of capital risked.
And at 25x, each dollar deployed in gold futures commands 25x the gold-price impact of a dollar invested outright! So spec gold-futures trading is essential to follow. If you want to stay abreast, I analyze every new CoT report in depth in our weekly and monthly newsletters. I explain how these traders’ latest gold-futures positioning compares to precedent and how it is likely to affect gold-price action, which is crucial to know.
This gold breakout surge is remarkable on this gold-futures disconnect alone, but becomes much more so when considering gold’s stage-three driver investment demand. Global gold-investment-demand data is only reported quarterly by the World Gold Council, too low-resolution to trade off of. But for many years, the combined gold-bullion holdings of the world’s largest physically-backed gold ETFs were a great proxy for it.
These of course are the dominant American GLD and IAU, which report their holdings daily. When they are climbing stock-market capital is flowing into gold, and vice versa. Despite gold powering up 31.2% since early October, this identifiable stage-three investment demand has tumbled! Even if GLD+IAU holdings only reflect gold demand from American stock investors, this disconnect is more remarkable than futures.
Again major gold uplegs are initially fueled by gold-futures short covering, then gold-futures long buying, and finally investment buying. The first two stages drive gold high enough for long enough to trigger the subsequent much-larger stages. So it is normal for GLD+IAU-holdings toppings and bottomings to lag gold’s own. But during this entire current gold upleg, those have continued grinding relentlessly lower.
As of midweek during gold’s 31.2% run over 6.4 months, GLD+IAU holdings have inexplicably fallen 5.0% or 64.3t! Normally those mirror gold uplegs, with American stock investors returning to gold to chase its upside momentum as rallying attracts them back. This anomaly is even more remarkable considering today’s upleg is the first since a pair in 2020 to achieve new record highs, which spawn self-feeding buying.
The financial media loves covering record highs, and investors love chasing them! The more new records gold achieves, the more it gets covered and the more bullish that reporting on CNBC, Bloomberg, the Wall Street Journal, and other major media sources. That greatly builds awareness of gold’s record run, which attracts in many traders not usually involved with this sector. This dynamic fuels gold’s strongest uplegs.
Back in 2020 two separate monsters crested at huge 42.7% and 40.0% gains, far bigger than today’s! Both those were overwhelmingly driven by American stock investors flooding into gold through differential GLD-and-IAU-share buying. During that first upleg GLD+IAU holdings soared 30.4% or 314.2t, and in the second they skyrocketed 35.3% or 460.5t! Today’s 31.2% upleg is remarkable with no investor buying yet.
At least not from American stock investors, which control the biggest pools of capital on the planet. I last wrote about this dead gold-investment demand in mid-January. I concluded then that “Gold’s precipitous mid-2022 plunge as the US dollar skyrocketed on monster Fed rate hikes really damaged gold psychology. So investors mostly sat out gold’s huge mean-reversion bull now achieving new records.”
And “They started returning in mid-2023, but were distracted by stock markets’ euphoric AI bubble.” I still think these are the main reasons American stock investors haven’t yet returned. But they almost certainly will as those factors fade. The more gold powers into new-record territory, the more gold psychology is turning bullish erasing mid-2022’s damage. And this latest stock-market bubble is really starting to roll over.
Between mid-January to late March, the flagship S&P 500 stock index achieved 22 new record closes of its own! With general stocks surging to the moon and sentiment euphoric, investors had no reason to worry about prudently diversifying their stock-heavy portfolios with gold. But during the few weeks since, the S&P 500 has suffered a 4.4% pullback at worst midweek while gold blasted to nine new record closes.
The longer stock markets grind lower on balance while gold forges higher, the more attractive it will grow to mainstream investors. So I fully expect American stock investors’ gold demand to return soon, for them to flood into GLD and IAU shares forcing big holdings builds. They have massive room to reallocate back in, and that normal stage-three buying will drive gold much higher. That’s because of how ETFs work.
Physically-backed gold ETFs are designed to track the gold price. But the supply and demand for their shares is independent of gold’s own, always threatening to force their share prices to decouple. The only way to ensure mirroring is to actively manage those ETFs’ shares outstanding, which shunts any excess supply or demand directly into underlying gold bullion. ETFs are conduits into gold for stock-market capital.
When American stock investors are buying GLD and IAU shares faster than gold is being bought, their share prices will accelerate ahead of gold’s. In order to avert failing their mission, those ETFs’ managers issue sufficient new shares to offset that excess demand. Then they immediately plow the cash proceeds from those share sales into physical gold bullion held in their vaults. That real demand accelerates gold’s gains.
Had you told me a few months ago gold would soar vertically to many new records despite little gold-futures buying, I would’ve been really skeptical. If you added that American stock investors would also flee as gold soared, I would’ve said no freaking way. For decades nearly all major-gold-upleg price action was explainable by combinations of spec gold-futures buying and differential GLD-and-IAU-share buying.
Yet here we are in a mighty upleg that is truly remarkable and unprecedented! Gold is being driven sharply higher by other traders outside of these usual suspects. The two leading candidates are central banks and Chinese investors. The former’s buying has accelerated dramatically in recent years, on fears of both a US-dollar devaluation on the US government’s insane overspending and weaponizing the dollar geopolitically.
According to the World Gold Council’s latest quarterly Gold Demand Trends report, CB buying averaged 511.9t annually in the decade ending 2021. But in 2022 and 2023, that doubled to 1,081.9t and 1,037.4t! While the WGC’s Q1’24 GDT hasn’t been released yet, anecdotal reports suggest CB buying this year remains very strong. Major central banks have long been overallocated in the dollar and underallocated in gold.
And Chinese investors have been getting ravaged by a brutal stock-market bear. The leading Chinese-stock ETF in the US is iShares MSCI China. Holding large and mid-sized Chinese stocks representative of China’s markets, that plummeted 62.9% from mid-February 2021 to early February 2024! During that bear, China’s authoritarian government tried many aggressive interventions all failing to stanch that bleeding.
While local stock markets burned, Chinese investors have also suffered a multi-year bust in real-estate prices after a bubble. And they can’t legally move their capital offshore to invest. So gold looks fantastic to besieged Chinese investors, powering higher in local yuan terms for major gains while everything else grinds endlessly lower. The WGC’s upcoming Q1 data on Chinese consumer gold demand should be telling.
Whoever is doing the buying, it hasn’t been gold-futures speculators in recent weeks nor American stock investors for gold’s entire upleg! That makes gold’s record breakout surge and 31%+ upleg so far truly remarkable. The great thing is neither central banks nor Chinese investors are likely to slow their buying anytime soon with gold shining so bullishly. When late American investors join in, gold ought to really fly!
With those guys still ignoring gold, they also aren’t paying attention to its miners’ stocks. They’ve started to surge and catch up with gold, but have a long ways to mean revert higher yet. They were battered to massively-undervalued and deeply-oversold lows in late February, incredibly anomalous relative to gold. At best during gold’s 31.2% upleg, the leading GDX gold-stock ETF has merely rallied an pathetic 33.0%!
Normally the major gold stocks amplify material gold moves by 2x to 3x, for upside targets way higher than current levels. And the smaller fundamentally-superior mid-tier and junior miners that we’ve long specialized in at Zeal fare even better. With unrealized gains as high as +72.6% midweek, our newsletter trades still have the potential to double or triple before this gold upleg matures! Big gold-stock gains are imminent.
The bottom line is gold’s recent breakout surge has proven truly remarkable. The latest third soaring to many new records wasn’t fueled by normal sources. The gold-futures speculators weren’t doing much trading, while American stock investors have been selling into gold’s entire upleg. That means big gold demand is surging outside of usual channels, probably mostly from central banks and Chinese investors.
This portends even-higher gold prices ahead. All that major new buying is likely to persist as surging gold fuels bullish sentiment. And since gold-futures speculators haven’t been doing the heavy lifting, they still have a large fraction of their original buying firepower for this upleg remaining. Add on to that American stock investors returning to chase gold’s upside momentum, and this powerful upleg looks far from over.
(By Adam Hamilton)
