GOLD News

Gold’s Remarkable Year
By: Adam Hamilton | December 27, 2024

Gold truly enjoyed a remarkable 2024, relentlessly powering higher to many new records. Gold achieved a rare monster-status upleg, which proved extraordinarily-unusual. Big gains stacked up despite extreme overboughtness, speculators’ exceedingly-overextended gold-futures positioning, and American stock investors not yet chasing gold’s upside. Several sources of major global demand coalesced for the heavy lifting.

For the past quarter-century, I’ve been in the contrarian-financial-newsletter business. All day everyday I’m blessed to study the markets, actively trade mostly gold stocks, and share all my research and trades with our newsletter subscribers. Few people in the world have been as deeply-immersed in gold and its miners’ stocks as I have. Coming from this meticulous heavily-studied perspective, 2024 was totally unique.

One year ago this week, gold was trading around a then-nominal-record $2,075. Some optimism was building, as in early December 2023 gold had just carved its first record close in fully 3.3 years. Yet at $2,071, that certainly wasn’t materially better than early August 2020’s $2,062. Incidentally gold’s run leading into that was its last monster-status upleg, soaring to 40%+ gains without any 10%+ corrections.

My first 2024 essay published back in early January was “Gold’s 2024 Breakout Upleg”. It pointed out “New records generate bullish financial-media coverage putting gold back on investors’ radars. They’ve always loved chasing winners, and will pile in to ride gold’s upside momentum.” So I wrote “With record-chasing momentum buying kicking in soon, it’s hard to imagine this current upleg not at least challenging 25%.”

“If today’s upleg only matures to 25%, that would still boost gold way up near $2,275. There will be many record closes between $2,077 and there, which will greatly boost bullish financial-media gold coverage and investor interest.” A year ago $2,250+ gold for the first time ever seemed doable, but hopeful and nowhere near certain. $2,050ish had been a graveyard in the sky for gold uplegs for several long years.

Indeed gold stalled early on, drifting 4.2% lower to $1,991 by mid-February. The problem was American stock investors weren’t piling in to chase gold’s upside momentum, which was necessary to fuel major gold uplegs. While gold was still a solid 9.4% higher from early-October-2023’s $1,820 upleg-birthing low, the combined holdings of the dominant GLD and IAU gold ETFs actually fell 3.8% or 48.2 metric tons!

These mighty American gold ETFs are the largest in the world by far, launched way back in November 2004 and January 2005. According to the World Gold Council’s comprehensive global data, exiting 2023 GLD and IAU together commanded 39.6% of all the gold bullion held by all the world’s physically-backed gold ETFs! A UK gold ETF at merely 6.9% was a distant third. Gold’s fortunes often depended on GLD and IAU.

These dominant gold ETFs are a conduit for the vast pools of American stock market capital to slosh into and out of gold. When American stock investors flood into GLD and IAU shares faster than gold is being bought, their prices threaten to decouple from gold’s to the upside. So their managers have to issue sufficient new shares to absorb that excess demand, using the proceeds to buy more gold bullion.

GLD and IAU gradually grew popular in the late 2000s, and since then gold has rarely achieved a major upleg over 25% without big capital inflows into them. And a monster 40%+ gold upleg not driven by huge GLD+IAU holdings builds seemed impossible. Gold’s last two monster uplegs both crested in 2020, at enormous 42.7% and 40.0% gains. American stock investors piling in overwhelmingly fueled both of them.

During the first before March 2020’s pandemic-lockdown stock panic, GLD+IAU holdings soared 30.4% or 314.2t. Then in the second blasting higher out of that extreme-fear event, they skyrocketed a gargantuan 35.3% or 460.5t! Had I known a year ago that American stock investors would totally ignore gold in 2024, I would’ve been way-less-bullish. Gold-futures speculators could push it higher, but their capital is quite finite.

Gold’s record-momentum-chasing dynamic failed to kick in this year because American stock investors were enthralled by the AI stock bubble. Gold has always been the leading alternative asset, the ultimate portfolio diversifier. Investors are most open to allocating more capital to gold when stock markets are weakening on balance. But in January and February, the flagship S&P 500 achieved fully 14 record closes!

Yet despite American stock investors being missing in action from gold, it rocketed higher in early March. On that month’s opening couple trading days, gold surged with 2.0% and 1.6% gains to new records of $2,083 and $2,115! Speculators stampeded into gold-futures longs after a top Fed official’s speech seemed to hint at new quantitative-easing bond monetizations possible, which was likely misinterpreted.

Specs bought an astoundingly-huge 55.0k long contracts that week, the fourth-highest ever witnessed! In seven trading days starting with that speech, gold surged 6.8% to $2,181. Despite those seven record closes in a row, American stock investors didn’t care. In mid-March, GLD+IAU holdings still slumped to a shocking 4.5-year secular low! Who needed gold when euphoric AI stocks were rocketing parabolic?

Yet gold kept blasting higher anyway, achieving twelve more nominal record closes into mid-April way up at $2,388. But neither American stock investors nor gold-futures speculators were doing any meaningful buying! With gold’s usual drivers not explaining its record-shattering surge, we had to wait for the World Gold Council’s outstanding quarterly Gold Demand Trends fundamental reports to gain key insights.

Released about a month after quarter-ends, these GDTs offer the best-available global gold supply-and-demand data. Q1’s and Q2’s revealed strong demand from Chinese investors and central banks. I wrote about this in a mid-April essay on gold’s remarkable breakout. Straddling March and much of April, this is readily apparent in this gold chart. Gold’s young upleg had already achieved mighty 31.2% gains by then!

With American stock investors refusing to play, gold’s upleg should have fizzled out around 25% gains or $2,275. But Chinese investors were flocking to gold because their own markets were collapsing. From mid-February 2021 to early February 2024, the leading US China-stock ETF plummeted 62.9% reflecting a brutal bear market in Chinese stocks. Many government interventions failed to staunch that bleeding.

While Chinese stock markets burned, an ongoing multi-year real-estate bust following a bubble heaped on the financial pain. That along with China’s laws preventing investors from moving capital offshore left gold a fantastic safe-haven alternative. Chinese investors flooded in, fueling frenzied buying resembling something of a popular mania. Central banks were also big gold buyers, partially on momentum-chasing.

Central bankers in charge of allocating reserves are human too, susceptible to the same herd greed and fear all investors face. But central banks also increasingly worried about their hugely-outsized holdings of US dollars. The dollar was being rapidly devalued through mind-boggling US-government overspending, as well as being weaponized geopolitically against Washington’s foes. So central banks remained major buyers...

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Fed Tests Gold Upleg
By: Adam Hamilton | December 20, 2024

The Federal Reserve somehow surprised traders with a hawkish rate cut this week. While that had been expected, apparently the Fed’s projected rate-cut trajectory slowed even more than feared. So market reactions were violent, including the US dollar blasting higher unleashing heavy gold-futures selling. This is the latest in a long line of Fed-spawned tests of gold’s resilience, challenging its current monster upleg.

From early October 2023 to late October 2024, gold skyrocketed 53.1% higher achieving a rare 40%+ monster-status upleg! Gold powered to 43 new nominal record closes in that remarkable span, despite massive uplegs’ usual driver being missing-in-action. Enamored with the AI stock bubble, American stock investors weren’t chasing gold’s upside momentum at all. That’s evident in the dominant gold ETFs’ holdings.

During that 12.9-month span, the combined holdings of the mighty GLD and IAU gold ETFs unbelievably slumped 0.4%! Big global demand catapulted gold higher while Americans ignored it, led by Chinese investors, central banks, and Indian jewelry buyers. Despite gold pulling back since the elections, this monster upleg remains alive and well. Amazingly it has yet to suffer a single upleg-slaying 10%+ correction.

Gold’s latest pullback surrounding Election Day clocked in at 8.0% total losses by mid-November, leaving it at $2,562. The gold-futures selling forcing gold lower was fueled by the US Dollar Index surging, with traders figuring the Fed would slow its rate-cut cycle under Trump. Sound familiar? That’s exactly what happened mid-week after this latest FOMC decision. Given that backdrop, markets’ sharp reactions were perplexing.

Back in mid-September leading into elections, the FOMC not only executed its first rate cut in 4.5 years but made it a crisis-level 50-basis-point one. Top Fed officials meet eight times per year to decide what to do with monetary policy, and every-other FOMC meeting is accompanied by their economic projections. The most-important facet is the dot plot, where individual Fed guys see their federal-funds rate in coming years.

Three months ago they forecast 100bp of total cuts in 2024 including that maiden one, followed by yet another 100bp in 2025. That benchmark USDX was pretty low then at 101.0, just 0.4% over a 13.3-month low several weeks earlier. Yet despite the political Fed officials trying to meddle with elections with that economically-unjustified outsized cut to goose stock markets, Trump’s chances of winning started rising.

Over the next five weeks, the USDX surged 3.4% along with Trump’s betting-market odds of victory. That trade assumed the Fed would really slow its rate-cut trajectory if Trump won. Something over 90% of the 400ish PhD economists working at the Fed are registered Democrats, the FOMC has a long history of being looser under Democrat presidents, and Republican lawmakers have challenged the Fed over the years.

Top Fed officials claim their decisions have nothing to do with politics, so they cited inflationary pressures under Trump. Extensive tariffs will raise import prices, and big tax cuts extended will leave Americans with more money to keep bidding up prices on goods and services. Whether much-different monetary policies under Trump instead of Harris are political or righteous, traders universally expected a tighter Fed.

So that huge US dollar bear rally accelerated after Trump won, the USDX blasting up another 3.9% to 107.5 over the next several weeks! That extended its total gains since late September to 7.1%, an enormous move in such a short span for the world’s reserve currency. The FOMC cut another 25bp at its next meeting two days after elections, but that was one of the off meetings not including FFR projections.

Traders actively speculate on and hedge for coming federal-funds-rate moves in futures. Those imply what markets are expecting the Fed to do. Between the FOMC’s maiden outsized cut in mid-September to FOMC Eve this week, those cuts collapsed. The day before the FOMC cut another 25bp for its third cut of this cycle, those futures implied traders were already expecting exactly 50bp of additional cuts in 2025!

Again that was down from 100bp next year in the previous dot plot three months earlier. So rationally if top Fed officials projected two or more 25bp cuts in 2025, markets shouldn’t have reacted much. That was priced-in, and the USDX had already surged sharply on yields staying higher for longer. On Tuesday the USDX closed at 107.0, while gold ran $2,644. Traders universally expected the FOMC to prove hawkish.

And it did, but merely aligned with shifted expectations after Trump’s decisive victory! Exactly on script, the FOMC again cut its FFR another 25bp to 4.38%. That made for 100bp of cuts in 2024, exactly what the previous dot plot predicted in mid-September. The FOMC only made one minor change to its statement, qualifying “additional adjustments to the target range” with considering “the extent and timing of” more cuts.

The Fed chair was expected to come across as more hawkish in his usual post-decision presser, and he did. I watched it live as always, and exactly as expected Jerome Powell’s opening statement declared more restraint on further cuts. Right upfront he warned, “With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive.”

“We can therefore be more cautious as we consider further adjustments to our policy rate. We know that reducing policy restraint too fast or too much could hinder progress on inflation. ... If the economy remains strong and inflation does not continue to move sustainably toward two percent, we can dial back policy restraint more slowly.” Importantly those press conferences start a half-hour after FOMC decisions.

Powell’s expected hawkishness wasn’t what fueled those violent market reactions, as they immediately ignited on that FOMC decision. And with that expected quarter-point cut and the FOMC statement barely changed from the prior meeting’s, the quarterly Summary of Economic Projections’ dot plot had to be the culprit. It is released at the same time as FOMC decisions, 30 minutes before Powell takes the podium.

Back in mid-September, top Fed officials had projected the federal-funds rate being 3.38% exiting 2025. This week they raised that 50bp to 3.88%, exactly as futures were pricing in the day before! The 100bp of cuts forecast next year three months ago were lopped in half to 50bp. Again the USDX already soared for much of that intervening span, on expectations for fewer Fed rate cuts under Trump leaving higher yields.

So it was shocking to see the US Dollar Index immediately soar on that dot plot, closing up a huge-for-it 1.0% to 108.1! That was the biggest USDX up day by far since the day after elections when Trump’s big win was already fully apparent. And it left this leading dollar benchmark at a 25.3-month high. How in the heck were currency traders surprised by the FOMC doing exactly what they had expected and priced in?

After decades of analyzing every FOMC decision, I have no idea what traders were thinking this week. Top Fed officials did up their PCE inflation forecasts for 2025 by 0.4% on a headline basis and 0.3% core, both to 2.5%. Maybe the currency guys figured a hotter inflation forecast implied even fewer than two total cuts next year across eight FOMC meetings. Maybe they worried the “Longer run” FFR edged up 0.1% to 3.0%.

The ironic thing is speculators sophisticated enough to trade super-leveraged currency futures should know the dot plot is notoriously inaccurate in predicting where the FFR will actually go! The Fed chair himself often warns about this in his post-FOMC-meeting press conferences. Examples are legion, as top Fed officials constantly change their outlooks based on the latest trends in jobs and inflation data.

The dollar inexplicably rocketing higher Wednesday unleashed intense gold-futures selling. Leverage in gold futures is extreme, and speculators in that hyper-risky arena look to the dollar’s fortunes for their primary trading cues. They are quick to dump gold futures when the dollar surges dramatically, which slams gold sharply lower. Wednesday’s gold plunge was the latest in many after FOMC hawkish surprises.

This week each 100-ounce gold-futures contract controlling $264,410 worth of gold on FOMC Eve only required traders maintain $11,500 cash margins in their accounts. That made for extreme maximum leverage of 23.0x! At those levels, a mere 4.3% gold move against specs’ bets would wipe out 100% of their capital risked. At 23x leverage, every dollar traded in gold futures also has 23x the price impact on gold.

So the USDX’s blistering rally after this latest FOMC decision unleashed big gold-futures selling, which slammed gold 1.9% lower on close to $2,593. Bearish psychology really flared, as seen in gold’s effective sentiment gauges of silver and the GDX gold-stock ETF. They plummeted 3.3% and 4.6% that day, the latter to a new post-election low! I thought gold’s 1.9% drop on that hawkish FOMC surprise was resilient.

The day after the elections, gold plummeted 3.0% as the USDX rocketed up 1.6%! Then the subsequent Monday, gold plunged another 2.3%. A couple weeks later, gold suffered a second huge 3.0% down day. So 1.9% isn’t even really big in recent context! And while that apparent hawkish Fed surprise tested gold’s monster upleg, it is nowhere near being in jeopardy as readily evident in any longer-term chart.

As humans, we traders are inherently-emotional. Our greed and fear runs wild on outsized daily moves, which we psychologically weight much more highly than they ought to be. The best antidote for fighting those dangerous emotions which lead to buying high then selling low is perspective. A 1.9% gold drop sure feels bad in real-time, but it’s barely noticeable when properly framed within its broader context.

This chart looks at gold superimposed over speculators’ gold-futures positioning over the last several years. Gold is rendered in blue on the right axis, while total spec longs and shorts are shown in green and red on the left. Gold has proven remarkably resilient since the elections, consolidating high keeping its monster upleg alive and well! So far gold has passed this latest hawkish-Fed test with flying colors.

Despite gold plunging 1.9% to $2,593 Wednesday, it remained well above that pullback low of $2,562 in mid-November. And again that total selloff clocked in at 8.0%, yet uplegs don’t end until selloffs exceed 10% entering formal correction territory. So even if gold-futures momentum selling in the Fed’s wake manages to force gold to a fresh pullback low, gold’s monster upleg remains intact anywhere north of $2,507.

That’s another 3.3% under mid-week post-FOMC levels, quite a ways lower considering fewer Fed rate cuts next year have already spent several months being priced in. As long as gold is merely pulling back and consolidating high, traders need to stay bullish on it. Gold’s 1.9% plunge this week actually makes its near-term outlook considerably more bullish. The main reason is big gold-futures selling had to fuel it...

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