Gold Stocks Wavering

Those fear-driven gains catapulted gold to $1572 on close, 1.2% above early September’s upleg peak of $1554. Gold-stock traders were apparently skeptical gold’s gains would hold, as GDX certainly didn’t amplify them like normal. As I warned in early January, gold stocks’ surge since Christmas Eve looked like a head-fake rally. Those gains didn’t look sustainable because of the situation gold itself was facing.

Gold speculators’ likely buying was effectively exhausted, while gold investors weren’t buying. Gold can’t enjoy uplegs without material capital inflows from either or both of these key constituencies. Speculators mostly game gold through gold futures, which allow extreme leverage exceeding 30x! Their positioning is reported weekly, and forms trading ranges when considered across gold’s current 4.1-year-old secular bull.

The latest spec gold-futures data before this essay was published was current to last Tuesday, January 7th, the very day gold peaked on US-Iran-conflict fears. Total spec longs, upside bets on gold, hit an all-time record high of 444.0k contracts! That implies spec gold-futures long buying is tapped out since both gold-futures traders and the capital they command is finite. They are effectively all-in gold, fully deployed.

Meanwhile, their total shorts, downside bets on gold, remained really low at 88.0k contracts. That was just 6.5% up into their trading range during this gold bull. In those gold-bull-to-date trading-range terms, they had room to buy and cover just 11.8k contracts. But they had room to sell short a massive 168.7k! The spec gold-futures shorts were near their effective floor, so traders likely weren’t able to buy materially more.

The most-bullish-possible near-term setup for gold is specs being 0% long and 100% short in gold-bull-trading-range terms. If positioning looked like that, the gold stocks would be poised for a major new upleg running from here. But this latest data revealed specs were actually 100% long and 7% short, which is still close to the most-bearish-possible for gold of 100% and 0%! Speculators can’t buy much more from here.

Even worse, they are going to soon have to sell a big fraction of their excessively-bullish bets to normalize their positions. Gold-futures contracts have expiration dates. So these all-time-record-high longs have to be sold sooner or later, which will push gold lower. And that could be much lower. Including both their longs and shorts, specs now have room to buy 11.8k contracts but room to sell 36.0x more way up at 426.1k!

So the gold stocks aren’t only not going to get help from more gold-futures buying, big gold-futures selling could slam them lower amplifying gold’s losses by 2x to 3x. That means the only hope for gold stocks to continue consolidating high rather than rolling over into a correction is gold investment buying. Although global gold investment demand is only reported quarterly, there’s a great daily proxy of investment capital flows.

That is the holdings of the leading and dominant gold exchange-traded fund, the GLD SPDR Gold Shares. GLD acts as a conduit for the vast pools of American stock-market capital to slosh into and out of gold. If you need to get up to speed on the critical importance of GLD capital flows evident in its holdings or that spec gold-futures trading, last week’s essay covered both in more depth. Gold stocks are this essay’s focus.

These lukewarm wavering gold stocks can only keep consolidating high if gold itself does. And with the gold-futures traders’ buying effectively exhausted, gold stocks’ only near-term hope is big gold investment buying. This chart of GLD’s daily gold-bullion holdings superimposed over gold, unfortunately, proves this isn’t happening. Investors were barely buying gold in recent weeks, and that has rolled over into selling.

(Click on image to enlarge)

Gold investment capital flows tend to lag gold somewhat, as investors are slower to respond to gold price swings than speculators. GLD’s holdings peaked at 924.9 metric tons of gold held in trust for shareholders in late September a few weeks after gold’s last upleg originally crested. Then investors’ enthusiasm for gold faded with its price, so GLD’s holdings fell 4.8% or 44.3t into mid-December as GLD shares were sold.

While gold’s downtrend-breakout rally happened on Christmas Eve, it was testing other key resistance the day before. So Friday, December 20th was really gold’s last normal correction day. Over the next couple of weeks, gold would surge 6.4% higher first on that breakout and later on the US-Iran conflict flaring. But American stock investors weren’t doing much buying, as GLD’s holdings only grew by 1.2% or 10.3t in that span.

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