Gold Investors Wavering

Gold has been sucking wind this summer, trudging along after getting slammed by a distant-future-rate-hikes scare. The resulting lower prices have really damaged psychology, leaving investors wavering on gold. Their recent capital inflows have reversed into modest selling, contributing to unusual weakness in this leading alternative asset. But investment demand should roar back in this inflationary environment.

Gold entered summer 2021 with strong upside momentum, in a young upleg that had just powered up 13.5% in 2.8 months by early June. This current interrupted upleg is the fifth of gold’s secular bull, and the previous four averaged big 33.3% gains. Gold was progressing nicely until the June 16th meeting of the Fed’s Federal Open Market Committee. The FOMC was expected to do nothing, and that’s what it did.

In a nothingburger monetary-policy decision, the FOMC left its zero-interest-rate policy and $120b per month of quantitative-easing money printing in place indefinitely. There were no hints that either of these hyper-easy policy stances would be changed anytime soon. The leveraged gold-futures speculators who dominate gold’s short-term fortunes should’ve yawned at that, and gone back to enjoying lazy summers.

But with every other FOMC decision, the Fed releases a Summary of Economic Projections that shows where individual top Fed officials expect to see certain economic data in coming years. That includes their outlooks for the federal funds rate, which are gathered in a scatter chart known as the “dot plot”. In mid-June’s version, 6 out of 18 top Fed officials thought there might be two quarter-point hikes into year-end 2023!

That was about 2.5 years into the future, an eternity away in the markets. And the dot plot has proven a notoriously inaccurate FFR predictor anyway. That very afternoon the Fed chair himself warned that the dots are “not a Committee forecast, they’re not a plan. ... the dots are not a great forecaster of future rate moves.”He said they should “be taken with a big grain of salt.”Jerome Powell advised to ignore the dot plot!

That is wise given dots’ dismal track record, as they’ve often proven dead wrong. Back in December 2015 after the first rate hike of the last cycle, top Fed officials expected four more rate hikes in 2016. But only a single one happened, a year later in December! In December 2018 with the ninth hike of that cycle, the dots predicted three more hikes in 2019 and 2020. Zero of those actually came to pass, that hiking was done.

Yet in mid-June 2021, futures traders active in US-dollar and gold contracts acted as if those distant-future hawkish dots were an official FOMC decree heralding a new hiking cycle. So they bid up the US dollar sharply on prospects for higher rates, which unleashed withering gold-futures selling. In three trading days starting with the FOMC, the US Dollar Index blasted 1.9% higher hammering gold a brutal 5.2% lower!

I wrote about that Fed-gold-futures purge extensively that very week, analyzing how specs’ positioning leading into it meant their selling firepower would quickly exhaust itself. That indeed proved true, as gold bottomed after that kneejerk several-day pummeling. But that anomalous plunge left serious sentiment damage in its wake. Bearishness flared overpowering bullishness, leaving traders discouraged on gold.

This indexed gold-summer-seasonals chart is updated from my latest essay on that research thread of a few weeks ago. It renders all modern-gold-bull-year summers in like terms by indexing gold’s price action to May’s final close. Note that mid-June’s ridiculous gold plunge on unofficial rate-hike projections way out into the distant future made for one of gold’s weakest summers ever. That has left investors wavering.

Out of 18 gold-bull years between 2001 to 2012 and 2016 to 2021, gold has only suffered a worse June once. That was way back in 2006, in a radically different situation that justified a sharp correction. Gold had just rocketed 46.2% higher in only 4.6 months into mid-May, leaving it incredibly overbought! So a big-and-fast correction was necessary to rebalance sentiment. That sure wasn’t the case this summer.

Gold has recovered some since that hawkish-Fed-dots pummeling but remains way down summer-to-date. By mid-July, gold had rallied 3.8% regaining about two-thirds of its post-FOMC losses. But gold had also fallen considerably in the few days leading into that FOMC meeting, as traders worried the Fed might warn it was starting to think about tapering its QE bond monetizations. That didn’t happen though.

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