Gold Consolidating High

Adam Hamilton     June 14, 2024     2265 Words

 

Gold has generally drifted sideways for a couple months now, consolidating high.  That lack of progress has significantly eroded sentiment, bleeding off greed and stoking bearishness.  But this healthy process is exactly what gold needed to rebalance sentiment.  After soaring to extremely-overbought levels in April, greed grew excessive.  The high consolidation since is bleeding that off, readying gold for another surge higher.

 

From mid-February to mid-April, gold blasted a powerful 20.0% higher in a remarkable breakout surge.  Fully 19 new nominal record closes were achieved in that short span, which really excited traders!  The lionís share of that upside wasnít fueled by goldís usual primary drivers, speculators buying gold futures and American stock investors buying gold-ETF shares.  Chinese investors and central banks took the helm.

 

But since hitting mid-Aprilís dazzling $2,388 record, gold has mostly ground sideways.  Initially a pullback emerged into late April, dragging gold a mild 4.0% lower.  Then the yellow metal reversed higher in a nice surge into mid-May, propelling it up 5.8% to $2,424.  But that renewed momentum quickly stalled out, and gold fell another 5.7% to $2,286 into early June.  Overall since mid-April, gold has drifted 2.7% lower as of midweek.

 

This recent drift has formed a trading range mostly running from $2,300 to $2,400.  Grinding sideways is the technical definition of a consolidation, and this is definitely a high one.  While these gold levels have started to feel normal over the last few months, $2,100+ gold was never even witnessed before early March!  Holding up here is really impressive technically, especially after surging to extremely-overbought levels.

 

Short-term price action drives sentiment, popular greed and fear.  That in turn regulates how fast traders buy and sell.  Even as a herd, the capital firepower they control is finite.  So if prices surge too far too fast generating too much greed, traders chasing that strong momentum can soon exhaust their buying.  That prematurely burns out uplegs, ceding control to sellers.  Staying healthy requires periodic sentiment rebalancings.

 

There are two ways to vent excessive greed fueled by big-and-fast rallies, selloffs and consolidations.  The former are quicker in crushing greed and stoking fear, proportional to how fast and far prices fall.  For selloffs 10% is the dividing line between pullbacks and corrections.  Goldís pair of modest pullbacks since soaring into mid-April have definitely helped, with herd sentiment considerably more bearish as they bottomed.

 

Consolidations also bleed off greed, working slower and taking longer.  Those sideways drifts generally donít generate much fear, which directly kills greed.  Instead lackluster price action gradually saps tradersí enthusiasm.  That has certainly been the case for gold since mid-April, with bullish excitement increasingly giving way to apathy.  Yet despite this high consolidation, gold remains up a strong 12.6% year-to-date.

 

While popular greed and fear are ethereal and canít be measured, they can be inferred through price action.  Greed flares proportionally with overboughtness, which reveals how fast and far prices have run.  My favorite measure of this simply divides prices by their trailing 200-day moving averages.  When these multiples are charted over time, horizontal trading ranges form.  Decades ago I built a trading system around this.

 

Called Relativity, it looks at prices relative to their 200dmas.  I define relative trading ranges based on the latest five calendar years of data.  In goldís case, that now runs between 0.90x to 1.15x its 200dma.  This rGold rangeís lower support is extremely oversold, while its upper resistance is extremely overbought.  Gold blasted higher so fast and far into mid-April that it soared well into this risky greed-drenched territory.

 

 

Price action is always best considered in context, and goldís blistering 20.0% surge in just 2.0 months is massive on this secular chart.  That stretched gold way up to 1.188x its 200dma, the most overbought it had been in fully 3.7 years!  In this chart the actual gold price in blue is superimposed over rGold in red.  That effectively flattens goldís 200dma to 1.00x, revealing how far gold deviates in constant-percentage terms.

 

It is exceedingly rare for gold to skyrocket 18%+ above its baseline 200dma.  That last happened briefly in late July and early August 2020, as a monster 40.0% gold upleg peaked!  Surrounding that gold spent 14 trading days over 1.18x, drenched in enormous greed and euphoria.  But that had to be rebalanced away, and soon was with a large 9.8% pullback which subsequently grew into a major 18.5% correction.

 

Extreme overboughtness is a bearish omen for gold, as I warned in a mid-April-2024 essay days before gold crested.  Then I wrote ďfast plunges are the normal way extreme overboughtness and greed are rebalanced.  But sometimes surging prices simply consolidate high... Sideways drifts after parabolic ascents also bleed off excessive greed, but with a much-slower pace.  They might take a few months to matureĒ.

 

And here we are a couple months later where gold indeed ground sideways to lower on balance.  This high consolidation since mid-April has really worked off those extremely-overbought conditions.  Again rGold had soared way up to 1.188x then, and has since retreated as low as 1.096x last Friday on another huge monthly-US-jobs upside surprise.  Gold is far-less overbought now, out of the sharp-selloff danger zone!

 

Goldís resilience in drifting rather than plunging in recent months is another striking show of strength.  Enamored by the euphoric AI stock bubble, American stock investors have totally ignored gold.  The combined holdings of the mighty US GLD and IAU gold ETFs have languished just above deep 4.5-year secular lows in recent months!  It is unprecedented to see record gold prices with those investors checked out.

 

Gold-futures speculators have plenty of room to sell too, particularly on the short side.  Incredibly their total short contracts just plunged to a stunning 4.0-year secular low!  They havenít ramped shorting despite these lofty gold prices.  Also June is the weakest time of the year seasonally for gold, its peak summer doldrums.  Any meaningful selling in this weak low-volume month could easily force gold well lower.

 

So seeing gold consolidate high between $2,300 to $2,400 over the last couple months is nearly as remarkable as its breakout surge to get here!  This sideways drift is doing its job, gradually bleeding off greed and overboughtness.  Thatís paving the way for goldís mighty upleg to resume in a big autumn rally.  That could easily expand goldís upleg, already up 33.2% at best in mid-May, to 40%+ monster status!

 

Thereís actually plenty of precedent for that.  Todayís gold upleg is the first to achieve streaks of new record highs since a pair of uplegs both cresting in 2020.  They achieved huge gains of 42.7% and 40.0%, fueled by powerful gold-record momentum.  This self-feeding dynamic is straightforward.  The more records gold hits, the more the financial media covers it and the more bullish that coverage gets building awareness.

 

Widely-reported strong upside momentum attracts in many new traders not usually paying attention to gold.  The more capital they deploy to chase its gains, the larger those grow reinforcing this virtuous circle.  So gold powering above $2,425 in coming months should attracts lots of new capital, especially if these bubble-valued US stock markets start decisively rolling over.  Goldís post-consolidation outlook is quite bullish.

 

After a couple months of grinding sideways to lower, this high consolidation is maturing.  It could persist for a few more weeks until the worst of the summer doldrums pass, but it doesnít need to.  Within healthy ongoing uplegs, the highest-probability support zone is around 50dmas.  Gold finally revisited its 50dma last Friday on that jobs-report plunge, and has traded under since then.  This drift has really bled off greed.

 

The big gold buying from Chinese investors and central banks, which I analyzed in depth in our latest June newsletter, is likely to continue.  The driving factors arenít going away, a serious secular bear in Chinese stock markets and the US government relentlessly inflating away its dollarís purchasing power.  And gold-futures speculators have plenty of room to buy, especially on the long side which is bigger than shorts.

 

But most bullish of all, American stock investors havenít yet started diversifying into gold.  Their overall portfolio allocations in it are still virtually zero.  Once gold has finally run high enough for long enough to catch their eye, they have vast buying to do to even establish small positions on the order of a few percent.  This upleg is an amazing anomaly, the only one of the gold-ETF era to grow large without gold-ETF buying!

 

Since early October, gold has powered 27.6% higher as of midweek.  Yet astoundingly during that span, the combined physical-gold-bullion holdings of GLD and IAU have still fallen 5.2% or 66.5 metric tons.  In those last record-streak-achieving uplegs peaking in 2020 at monster 42.7% and 40.0% gains, GLD+IAU holdings soared a massive 30.4% or 314.2t and 35.3% or 460.5t!  This time American buying hasnít even started.

 

Gold stocks remain the best way to leverage major gold uplegs, as their earnings and thus stock prices amplify gold upside.  The major gold stocks of GDX have also been consolidating with their metal lately, bleeding off greed and overboughtness.  The rGDXís trading range is wider, running from 0.75x to 1.35x its 200dma in the last five years.  Lagging their metal, gold stocks didnít get extremely overbought in this upleg.

 

 

At best during goldís 33.2% upleg so far, GDX has only rallied 43.8%.  That makes for merely 1.3x upside leverage to gold, still way under major gold stocksí usual 2x-to-3x range.  But gold stocks are catching up as I explained in an essay a couple weeks ago.  Their leverage is accelerating since goldís remarkable breakout surge, regaining normal levels!  And it should grow a lot bigger as this gold upleg hits monster status.

 

During that last 40.0% record-achieving one peaking in August 2020, GDX soared 134.1% for fantastic 3.4x upside leverage!  The longer gold powers higher on balance, the more traders flock to gold stocks and the faster their gains outpace goldís.  So as goldís upleg resumes after this high consolidation has sufficiently rebalanced sentiment, gold stocks should greatly outperform.  Their setup is more bullish than goldís.

 

Because gold stocks have lagged gold, they never hit extreme overboughtness.  GDX only climbed to 1.253x its 200dma in mid-May, still well under 1.35x+ extreme levels.  Yet since their metal has drifted sideways to lower in recent months, so have gold stocks.  Last Friday when gold plunged on that US-jobs beat, the rGDX fell to 1.111x.  And as I pen this essay on the following Thursday, it is running just 1.090x midday.

 

So gold stocks arenít even very overbought anymore, any greed that was building in mid-May has been eradicated!  While consolidations donít generate much fear, they fuel serious apathy which is certainly apparent in this sector.  Traders donít hate gold stocks like they did in mid-February when the rGDX plunged to just 0.870x, but they sure arenít interested.  That will change fast as gold resumes powering higher.

 

Before this gold upleg gives up its ghost, the major gold stocks of GDX will almost certainly again achieve their usual 2x to 3x upside leverage.  So a 40% gold upleg should drive 80%-to-120% gold-stock gains.  That makes for conservative GDX targets between $47 to $57, way above $34 midweek levels!  And if this gold upleg proves even bigger as American stock investors return, gold-stock gains will grow proportionally.

 

And the gold minersí upcoming Q2 earnings season from mid-July to mid-August should really accelerate institutional-investor buying.  So far in this almost-over quarter, gold is averaging a stunning $2,340!  This is a new all-time record trouncing the previous $2,072 in Q1.  Gold miners are also projecting higher output this quarter pushing mining costs lower, which should make for their fattest earnings ever reported by far.

 

And the fundamentally-superior smaller mid-tier and junior gold miners will fare even better than the GDX majors.  They are better able to consistently grow their production from lower bases, and tend to operate lower-cost mines.  So the better gold stocksí upside potential is huge as goldís upleg resumes.  Its high consolidation is creating a good mid-upleg buying opportunity, where speculators and investors can load up.

 

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The bottom line is goldís high consolidation in recent months is healthy and bullish.  Soaring into mid-April left gold extremely overbought with rampant popular greed, which risked prematurely burning out this mighty upleg.  Gold needed to pull back or consolidate to work off those super-overbought conditions and rebalance sentiment.  The latter has happened since, with gold mostly drifting sideways from $2,300 to $2,400.

 

Gold holding these record levels despite American stock investors not yet participating has been a great show of strength.  Sooner or later theyíll return, accelerating this gold upleg to monster 40%+ gains.  And Chinese investors and central banks will likely continue buying.  That portends gold rallying to more new records in coming months.  The lagging gold stocks should increasingly amplify this upside to massive gains.

 

Adam Hamilton, CPA     June 14, 2024     Subscribe