Gold VS Fed
2022.12.17 01:26
Gold VS Fed
Budrigannews.com – This week, gold defied a further hawkish trend and quickly reached new highs. After gold was hammered for roughly a half-year by this extreme Fed tightening cycle, that was an impressive display of strength. This strong performance reflects the decreasing resolve of gold-futures speculators to continue shorting. They have exhausted their long-side selling and need to buy a lot of mean reversion, which is extremely positive for gold.
Prior to the most recent meeting of the Federal Open Market Committee this week, gold offered excellent technical prospects. It had surged 11.5% higher since the end of September thanks to significant buying of gold-futures short-coverings. On FOMC eve, gold surged above its crucial 200-day moving average for the first time since mid-June as a result. After breaking out of its downtrend, gold was just a hair away from a decisive 200dma breakout.
With the Fed increasing its federal funds rate by 50 basis points, the FOMC’s decision was not surprising in and of itself. That marked a significant slowdown in comparison to the streak of massive 75bp hikes that it had implemented at its previous four meetings. From the previous version, which was issued at the beginning of November, the FOMC statement remained essentially unchanged. Gold-futures speculators were unaffected by the widely anticipated 50bp increase this week. They had their attention elsewhere.
When a quarter after each other FOMC choice, the Fed delivers its Outline of Financial Projections by individual top Took care of authorities. Since it depicts where they anticipate FFR levels will go in the future, this is more commonly referred to as the dot plot. Even though the Fed chair himself admits that the FFR is notoriously difficult to predict, traders take advantage of that. It was more hawkish than expected this week.
The Fed’s projections are at midpoints because the FOMC targets a 25-basis-point range for the FFR. They collectively predicted 4.63 percent exiting 2023 in the final dot plot at the end of September. This indicates that the FOMC intends to raise interest rates by 4.5 percent to 4.75%. The median dot was anticipated to rise by 25 basis points to 4.88 percent, representing 4.75 percent to 5.0%. Instead, it increased 50 basis points to 5.13 percent, indicating a target of 5.0%-5.25 percent FFR by year’s end 2023.
After this week’s 50bp increase, the FOMC would need to hike another 75bp to reach that. After the Fed’s extremely aggressive shock-and-awe campaign of 425 basis points since mid-March, that didn’t seem like a big deal! Over those seven FOMC meetings, a normal rate-hike cycle would have been 175bp, or a quarter point, per meeting. Therefore, 85% of the Fed’s total 500bp move is already accomplished. Additionally, the dot plot is a poor predictor once more.
After the FOMC’s mid-December 2021 meeting, these same high-ranking Fed officials predicted a FFR of just 0.8% by the end of 2022! Additionally, these elite central bankers anticipated a 4.0% increase in US GDP this year, while their preferred PCE inflation gauge would only increase by 2.6%. They were completely wrong when they now see the FFR, GDP, and PCE for 2022 at 4.38 percent, a stalling economy of +0.5 percent, and raging inflation of +5.6 percent!
Nevertheless, markets were significantly moved by even a single projected quarter-point increase. Prior to that FOMC decision, the flagship stock index was up 0.8 percent; however, a few hours later, it plunged to a closing loss of 0.6 percent. Prior to it, gold was steady around $1,810, right at its upleg closing high. However, despite those pessimistic dots, gold only fell to $1,799. For a hawkish surprise, the selling of specific gold futures was muted.
That was despite the fact that the primary cue provided by these gold bullies was to persuade them to dump more futures. The fluctuated between a 0.4% daily loss prior to the FOMC and a 0.2% gain shortly thereafter. The world’s reserve currency saw a significant rise as a result. However, gold quickly recovered from that minuscule loss of 0.6 percent to remain flat and closed only 0.1 percent lower. Because futures speculators did not dump, gold defied the hawkish Fed.
That was even more impressive when you consider that a half-hour after that FOMC decision, the Fed chair held a press conference that was surprisingly hawkish. Jerome Powell delivered a double-barreled assault of additional hawkish jawboning without equivocation. I listen to all of his press conferences live because I work in that field, and I was surprised to hear him be so aggressive after the epic 425 basis point increase in federal funds rates in just 9.0 months! He really added weight.
During the press conference, he said, “restrictive.” Powell advised,
“I’ve told you today we have an assessment that we’re not at as restrictive enough stance, even with today’s move. Restoring price stability will likely require maintaining a restrictive policy stance for some time.”
On inflation, he said:
“But it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”
So while dealers had anticipated that Powell should appear to be timid in his comments after such rankling rate climbs this year, all things being equal, he waxed very hawkish. Gold has experienced a sharp decline as a result of futures selling following previous press conferences held after the FOMC in which the Fed chair made hawkish statements. However, this week, the yellow metal brushed aside all of that to slide sideways in the wake of the FOMC. Given the ugly selloff-spawning setup, that is very bullish behavior!
This essay’s data deadline is Wednesday, but I’m writing it on Thursday morning. Even though gold fell overnight, keep in mind that the Bank of England and the European Central Bank both made significant 50bp increases early on Thursday, New York time. The euro fell sharply, boosting the US dollar, as the ECB’s overall hawkishness was lower than anticipated. That was more to blame for the selling of gold futures on Thursday than the reaction after the FOMC.
I had written a bold contrarian essay six weeks earlier, shortly after the previous FOMC decision, arguing that the Fed’s dollar/gold shock was coming to an end. The USDX had taken off on the Federal Reserve’s beast climbs up to that point, hitting a super 20.4-year mainstream high. That sparked massive selling of gold futures, sending gold sharply lower. That is what I wrote the day after the most recent FOMC decision, when gold closed at $1,631.
More Gold on the Verge of a Breakout?
After the fourth massive 75bp FFR hike in a row, my contrarian thesis was ignored, with gold trading just 0.5 percent above its panic-grade late-September low. I was correct, as this updated chart demonstrates. After the FOMC’s decision in early November, the (USDX) collapsed, resulting in sufficient large short covering of gold futures to propel gold sharply higher. The USDX plunged 7.5% on each FOMC day, while gold rose 10.5%!
Six weeks ago, when gold was on the verge of making major new lows, my contrarian thesis was straightforward. The FOMC has limited leeway to raise the FFR, despite the fact that senior Fed officials are free to speak as hawkishly as they please. It had completed an extremely extreme 375bp of hiking in just 7.6 months, putting the target range at a 3.88 percent midpoint at that point. That was close to the dot-plot terminal FFR of 4.63 percent at the end of 2023.
Five-sixths of this rate-hike cycle had already passed, with 375 bp already completed and another 75 bp anticipated at the time! I argued then that “the Fed’s ability to keep shocking the dollar and gold is coming to an end” with only a few hikes remaining. I closed “Their government finances rate is approaching terminal-level projections, generally ruling out additional hawkish shocks.” That was very positive for gold and very negative for the US dollar.
As a result, I went on to say, “Without those to keep goingosing the parabolic US dollar, it is overdue to roll over hard in massive mean-reversion selling.” The massive normalization buying in gold futures, which have been driven to bearish extremes, will be fueled by the weaker dollar. Even though few people at the time thought it was even remotely possible, exactly that has occurred since! This thesis is supported by Gold’s strong performance prior to and during this week’s FOMC.
Those highly leveraged gold-futures speculators control the price trends of gold when investors lose interest due to a lack of upside momentum. They are able to bully gold in a way that is way above their weight due to the extreme leverage they use. The erratic price movement of all gold this year is explained by their trading. Additionally, the US dollar’s reactions to the Fed’s numerous hawkish surprises in 2022 had a significant impact.
That really got going in the middle of April, when the most recent headline CPI inflation print showed a rise of 8.5% year-over-year, arguing for Fed rate hikes that were more aggressive. As a result, the USDX parabolic experienced a truly epic 14.3% rally throughout September! Gold experienced a brutal drop of 17.9% during the same time period, helped along by the USDX’s positive responses to hawkish Fed surprises. That was entirely driven by massive sales of gold futures.
In Commitments of Traders reports, speculator gold-futures positioning data is only available weekly as of Tuesday closes. Specs sold 80.0k short contracts and disposed of a massive 145.9k long contracts during the 24 CoT-week period when gold plunged in the middle of the year. That’s the equivalent of selling 702.8 metric tons of gold, which is a lot more than the markets can handle in that short amount of time! Specs threw everything they could.
Their capital firepower is quite limited despite their extreme leverage through futures. As gold carved a deep stock-panic-grade low of $1,623 toward the end of September, specs’ total gold-futures longs and shorts were running 0% and 100% up into their trading ranges from the previous year! That’s the most likely near-term setup for gold to go up, which means that big mean-reversion buying is the only option left.
The positioning of spec gold-futures had not significantly altered prior to the upcoming FOMC meeting at the beginning of November. The total number of spec longs and shorts was still 95% and 4% higher than their previous trading ranges. Specs still had a lot of room to buy longs and buy to cover shorts, both of which would push gold significantly higher. Gold surged 21.5% in 3.3 months following the most extreme spec gold-futures positioning since May 2019!
Gold was due for significant gold-futures buying because speculators’ selling capacity was largely exhausted and the Fed’s ability to continue shocking traders with its hawkish rhetoric was decreasing. That shot gold up 10.5% between these last couple FOMC gatherings. All of that interestingly happened on the short side of the trade, with specs buying to cover 60.9 thousand contracts, or 189.5 GE tonnes, in the last five reported CoT weeks.
Still, specs’ short-covering buying isn’t over, as their shorts were still 30% higher than last year on Tuesday. That should drop close to zero before they finish buying, so about a third of that short covering will still come. Leveraged gold-futures short selling is now a lot more risky because of gold’s strong performance following the hawkish FOMC meeting in early November and its continued defiance of the hawkish encore this week!
As a result, specs are naturally losing interest in it. But what has transpired over the long term is the reason I am writing this essay. Despite the sharp rise in gold since the beginning of November, the total number of spec longs has actually fallen by 5.6 thousand contracts as of the most recent reported CoT week! That is 17.6 tonnes of selling against gold’s recent mean-reversion rally. Spec longs are still just 4% higher than their range from last year!
Surprisingly, as of last Tuesday, total spec longs were only 0.7% higher than when gold reached its lowest point near $1,623 in September! Even though gold was significantly higher that day, trading at $1,772. Currently, virtually no long-side buying is extremely bullish on gold. Since longs have outnumbered shorts by an average of 1.9 times over the past half-year, spec longs are proportionally more important than shorts. Big long buying will continue to occur.
The gold-futures specifications would need to purchase a staggering 144.2 thousand long contracts in order to return to levels that existed in mid-April before the hawkish surprises from the Fed sent the US dollar skyrocketing. They also have room for 13.8 thousand more short-covering purchases. That amounts to 491.5 tons of buying at gold-equivalent prices, which dwarfs the 189.5 tons of buying at short-covering prices so far! That would intensely speed up gold’s upleg.
Specifications will become increasingly interested in betting on additional gold upside as gold continues to defy Fed hawkishness and surge higher between these most recent FOMC meetings. Their purchases will amplify and feed that, generating a positive feedback loop of capital inflows. The three stages of a gold upleg are gold-futures short covering, gold-futures long buying, and ultimately much larger investment buying.
We have completed approximately two-thirds of stage one, but stage two has not yet begun! As investors and speculators return to longs to normalize their excessively bearish bets, Gold’s young-upleg gains could easily double or triple over the next half-year or so. The stocks of gold miners will be the most benefited by a major gold upleg that is currently underway. According to the most recent chart, they are already exploding.
The leading gold stock benchmark, the GDX VanEck Gold Miners ETF (NYSE:), is depicted in blue, while the red line represents gold. Between its own panic-inducing lows in late September and the beginning of December, the GDX has already surged 37.4% higher! That has already increased gold’s own parallel gold-futures-fueled mean-reversion upleg by an impressive 3.2 times.
But the young gold-stock upleg can only get started if big spec gold-futures buying keeps gold moving higher. GDX was up close to $41 in mid-April, prior to the whole Fed-hawkish surprise gold slaughter. A further gain of 379.9 percent from the FOMC-day close this week would be necessary to return to those modest levels alone. In addition, the upside potential of gold stocks is far greater than that, as I discussed in my essay from last week.
More Gold technical analysis for 16-11
All of this is important because it is necessary to succeed in the markets to cultivate excellent contrarian information sources! In the event that you follow the standard crowd in trading, you’ll be ill-fated to purchase high as eagerness rules after significant floods then, at that point, sell low as dread returns after serious selloffs. Fighting the crowd is difficult to master when doing it the right way by first buying low out of fear and then selling high out of greed.
For 20+ years presently we’ve distributed a couple antagonist pamphlets to assist examiners and financial backers with doing exactly that. We were aggressively filling our newsletter trading books with great fundamentally superior mid-tier and junior gold stocks and silver stocks at outstanding bargain prices while I was writing those essays on gold bottoming, including the contentious one on the Fed’s dollar/gold shock ending in early November.
As is typical, their gains are already overtaking the major gold miners that control GDX. We had unrealized gains in our most recent newsletter trades of up to +73.7% as of FOMC eve this week! Using a contrarian approach to market analysis is the only way to increase your chances of buying low and selling high. That implies doing broad exploration to recognize plausible pattern changes before the crowd acknowledges they are going on.
The bottom line is that gold is still defying the hawkish Fed. Gold remained strong following this week’s FOMC meeting after soaring since the previous one. Material gold-futures selling did not occur despite the dot plot predicting more rate hikes than anticipated and a press conference by the Fed chair that was extremely hawkish. Due to the fact that speculators have exhausted their long-side capital firepower for selling, gold has become too risky to resume leveraged shorting.
As specs continue to normalize their excessively bearish bets, Gold’s young mean-reversion upleg is likely to grow significantly in the coming months. They still have all of their much larger long-side buying and about a third of their likely short-covering buying! With the majority of this extreme rate-hike cycle over, speculators are now realizing that the Fed’s ability to hawkishly surprise is over. That is extremely encouraging news for gold miners.
