Gold’s Peculiar Surge

Feb 22, 2020 | Gold

Gold is enjoying an awesome week, surging back above $1600 for the first time in nearly 7 years!  That big round psychologically-heavy level is really catching traders’ attention, great improving sentiment.  Yet this recent gold surge has proven peculiar.  Unlike normal rallies, the buying driving this one largely hasn’t come from gold’s usual primary drivers.  The stealth buying behind this surge may impair its staying power.

This Tuesday gold surged 1.2% higher to close near $1602.  It hadn’t crested $1600 on close since way back in late March 2013 fully 6.9 years ago!  Long-time gold traders shudder at the dark spring which followed.  Within less than several weeks after that last $1600+ close, gold plummeted 16.2%.  Most of that came in mid-April, when gold effectively crashed by cratering a brutal 13.8% in just 2 trading days!

By late June just 3.0 months after that last $1600+ close, gold had collapsed a catastrophic 25.3%!  That horrific episode had no real driver.  Once gold breached $1550 tripping stop-loss orders, heavy gold-futures and investment selling cascaded.  That ended up looking like a gold panic, and sentiment has yet to fully recover from its devastating aftermath.  So regaining $1600 is an incredibly important event for this asset.

Gold breaking out back above $1600 fueled more momentum buying, extending its surge to $1611 on Wednesday.  That left gold up 6.1% year-to-date, an extraordinary move given the circumstances.  The US stock markets have also soared this year on the Fed’s extreme QE4Treasury monetizations, which have fueled epic euphoria and complacency.  The flagship US S&P 500 stock index was also up 4.8% YTD.

As the ultimate alternative investment which tends to rally when stocks falter, gold is normally forgotten when stock markets power to series of new record highs.  The US dollar has also been really strong so far in 2020 too, with its benchmark US Dollar Index surging 3.2% YTD as of the middle of this week.  Big dollar rallies usually unleash sizable gold-futures selling, which pushes gold lower in inverse proportion.

Seeing gold surge to major secular highs despite euphoric lofty stock markets and such a strong dollar is peculiar and anomalous.  And the mystery deepens when considering recent months’ activity in gold’s two dominant primary drivers, speculators’ gold-futures trading and American stock investors’ capital flows.  Neither have seen anywhere near enough buying to explain gold’s impressive surge in this young new year.

Seasoned traders including me don’t know what to make of this.  That’s evident in the odd indecisiveness of the major gold miners, which have largely stalled out instead of following gold higher.  Back in early September when this gold upleg originally peaked, the leading GDX gold-stock ETF and gold crested at $30.95 and $1554.  But even with gold 3.7% higher at $1611 this week, GDX was still 3.9% lower at $29.75!

This strange disconnect of gold stocks grinding sideways to lower while gold forges major new highs reveals lots of skepticism about gold’s staying power.  The hardened contrarian gold-stock traders aren’t aggressively deploying capital like normal in gold uplegs.  Gold just doesn’t rally with record-high stock markets, a strong US dollar, and minimal capital inflows from the usual gold-futures and investment buying.

China’s terrifying coronavirus outbreak is likely the unique stealth-gold-buying-boosting catalyst.  Recently formally named COVID-19 by the World Health Organization, that virus is the scariest thing I’ve seen in my lifetime.  China’s unprecedented draconian quarantine measures affecting hundreds of millions of its citizens and shutting down its economy reveal how exceedingly dangerous that never-before-seen virus is.

I’ve followed that outbreak in depth day-by-day in our newsletters, and it is shocking.  Indian and even Chinese researchers have written expansive scientific papers arguing COVID-19 was almost certainly biologically engineered in a lab in Wuhan before escaping.  Epidemiologists around the world believe that China’s government is radically underreporting the infection and death counts, covering up this catastrophe.

Brave Chinese people in the hot zone are using VPNs to post videos to western social media to show what’s really going on.  There’s footage of people collapsing in the streets, hospitals overflowing, piles of bodies, and clouds of weird smog in a shut-down city that locals think is from mass incineration of bodies!  COVID-19 is incredibly virulent and deadly, even to relatively-healthy younger people.  That pathogen is dreadful.

This plague that has real potential to snowball into the first global pandemic in a century is certainly a great reason to buy gold!  It is a potential black-swan event, a fat-tail risk unlike anything ever seen before.  But novel-coronavirus-fueled gold buying should show up in gold’s normal primary drivers.  It has to some extent, but at way-too-constrained levels to explain gold’s powerful surge back over $1600 this year.

Most short-term gold-price action is driven by speculators’ gold-futures trading.  These traders punch far above their weights relative to their capital deployed because of the extreme leverage inherent in that realm.  As of this week, each gold-futures contract controlling 100 ounces of gold worth $160,000 at $1600 only requires traders maintain cash margins in their accounts of $5000.  That implies 32.0x max leverage!

Running at 10x, 20x, or 30x, every dollar of capital deployed in gold futures has 10x, 20x, or 30x the price impact on gold as a dollar invested outright.  Speculators’ collective gold-futures trading is published at a weekly resolution in the famous Commitments of Traders reports.  Unlike normal gold uplegs, gold’s big breakout surge so far in 2020 isn’t explainable by what these influential gold-futures traders have been doing.

 By: Adam Hamilton, CPA, Zeal Research via Gold Seek

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