Gold Surges Near Breakout

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 of 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.

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