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Gold’s Remarkable Breakout
By: Gold’s Remarkable Breakout | April 19, 2024

Gold’s powerful breakout in recent months has proven remarkable. But the reason isn’t its fast vertical surge to impressive record heights. This breakout rally is exceptional because gold’s usual drivers aren’t fueling it. Big demand outside of normal channels is catapulting gold deeper into uncharted territory, which is really bullish. That’s preserving capital firepower for buying from gold’s regular speculators and investors.

In the quarter-century I’ve been actively trading gold stocks and writing contrarian newsletters, my focus has always been what’s moving markets and why. That key causal chain from underlying drivers to price action is essential to study and understand, leading to more-profitable trading. Knowing the why markets move leads to superior timing on the when of actually buying low and selling high, increasing trading success.

Every major gold upleg during the past couple decades was fueled by combinations of three sequential stages of buying from specific groups of traders. The first is speculators covering gold-futures shorts, the second is specs buying gold-futures longs, and the third is investors returning to chase gold’s resulting upside momentum as evident in major-gold-ETF holdings. But that model isn’t fully explaining today’s upleg!

Initially it played out according to script. Gold bottomed at $1,820 in early October after a gold-futures-shorting-driven violent breakdown. The very next morning I published an essay concluding “Their shorts in particular are likely challenging major secular highs, which are never sustainable for long. That guarantees huge mean-reversion short-covering buying is imminent, which will catapult gold sharply higher.”

That indeed came to pass, with gold surging 13.8% into early December to $2,071. That proved its first nominal record close in fully 3.3 years, likely to soon fuel frenzied momentum-chasing buying. Normal speculator stage-one and stage-two gold-futures buying drove that, which was massive during that span. Only released weekly, speculators’ aggregate gold-futures positioning data is current to Tuesday closes.

Over the eight Commitments of Traders weeks best matching gold’s initial surge, specs bought to cover 65.0k short contracts and added another 71.5k long ones. That’s equivalent to 424.6 metric tons of gold buying, a massive amount in a couple months! That averaged 17.1k contracts of spec buying per CoT week, which is very large. Specs’ perfectly-normal early-gold-upleg gold-futures buying is evident in this chart.



Gold’s sharp mean-reversion higher out of that oversold and unsustainable early-October low resulted from big spec gold-futures buying. Note that major reversal was first triggered then initially driven by huge stage-one short covering, the red spec-shorts line plunged! That propelled gold high enough for long enough to attract in stage-two long buyers, which is evident in the green spec-longs line soon surging too.

That was all totally normal, the same short-covering-then-long-buying dynamic that fuels most major gold uplegs. But just as gold was finally reclaiming record territory, that spec gold-futures buying was depleting. As this chart illustrates, both spec shorts and longs have secular trading ranges. The lower support zone for the former is around 95k contracts, while the upper resistance zone for the latter is near 415k.

Generally buying peters out around those levels, indicating speculators’ gold-futures buying firepower has been largely exhausted. There aren’t many traders willing to bear the extreme risks inherent in hyper-leveraged gold-futures trading, and the capital they control is relatively small in the grand scheme. So when this gold upleg was born, the distances between current positioning and these zones revealed likely buying.

Back in early October, speculators had probable room to buy to cover 79.4k shorts and add 150.2k longs before hitting 95k and 415k respectively. That added up to 229.6k or 714.0t. But by early December, all that buying had expended much of that upleg’s potential, with specs only having another 14.4k shorts and 78.7k longs left. That was 93.1k contracts or 289.4t, just 4/10ths of that initial buying firepower remaining...

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