Gold Stocks Wavering

There was little investment buying fueling gold’s recent spike to a new 6.8-year secular high. The lion’s share of the gold buying driving those fast gains came from speculators buying gold futures. In roughly that same span, specs added 43.7k gold-futures longs. That’s the equivalent of 135.8t of gold buying, or 13.2x more than GLD’s holdings build! Gold’s breakout can’t continue without big investment-capital inflows.

But much more ominously, over this past week that modest differential-GLD-share buying has turned into sizable investment selling. Once gold’s sharp geopolitically-fueled gains proved unsustainable, investors quickly resumed exiting. In just 3 trading days ending last Friday, GLD’s holdings plunged 2.4% or 21.7t! That more than wiped out recent weeks’ entire build, dragging GLD’s holdings to a fresh correction low.

It’s certainly understandable investors aren’t enamored with gold. After spending just two trading days at new upleg highs early last week, that breakout fizzled out. And gold investment demand usually proves weak anyway when stock markets are near record highs spinning off great euphoria. That’s certainly the case today, thanks to the Fed’s extreme easing via ongoing QE4 money printing monetizing US Treasury bills.

The gold investment capital flows per their leading daily proxy argue that gold’s breakout spike was just a temporary anomaly with no foundation. If this gold investment selling persists on balance, it is going to push gold lower. That could unleash the vast pent-up selling from speculators’ record gold-futures-selling overhang. Being effectively all-in, the gold-futures specs really couldn’t buy more even if they wanted to.

The continuing viability of gold stocks’ high consolidation in recent months is totally dependent on gold’s fortunes. Gold needs ongoing capital inflows to stay high or rally higher. The gold-futures specs can’t buy, and the gold investors aren’t buying. If the investors’ recent selling pushes gold low enough to start unleashing that massive gold-futures selling, gold will roll over into a correction dragging gold stocks with it.

These lukewarm wavering gold stocks have only consolidated high because gold has. They will definitely get dragged into a real correction if gold breaks down. And that’s very probable given speculators’ current gold-futures positioning and investors’ ongoing gold selling. If gold falls 10% from here, which is mild by bull-to-date standards, the major gold stocks as represented by GDX are likely to amplify that to 20% to 30%.

That’s a lot of asymmetric downside risk compared to the very-limited short-term upside at best! So it remains prudent to be wary here, these relatively-high gold-stock levels likely aren’t sustainable. The fortunes of this sector overwhelmingly depend on gold’s own. And both gold-futures speculators and gold investors seem far more likely to sell than materially buy in the near future. That’s certainly bearish for gold stocks.

The bottom line is gold stocks have been wavering in a high consolidation only because gold has mostly done the same. The gold miners can’t break out to the upside without sustained higher gold prices. But that’s really unlikely given speculators’ record excessively-bullish bets and investors continuing to sell on balance despite gold’s recent geopolitical spike. That investment selling will likely trigger big gold-futures selling.

That would force the gold stocks to roll over into a real correction, breaking down to the downside. That’s normal after major uplegs in this gold bull, rebalancing sentiment way more quickly than drifting sideways can. Gold-stock traders must remain wary until speculators’ extreme gold-futures positioning finally gets normalized through big selling. That will usher in the buy-low opportunities before gold’s next major upleg.

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