Gold defied another hawkish Fed decision this week, consolidating high in its immediate wake. That was an impressive show of strength, after this extreme Fed tightening cycle hammered gold for a half-year or so. That strong performance reflects gold-futures speculators’ weakening resolve to keep shorting. With their long-side selling exhausted, they have massive mean-reversion buying to do which is super-bullish for gold.
Gold was looking really good technically heading into this week’s latest Federal Open Market Committee meeting. Since late September, it had blasted 11.5% higher in a powerful rebound on big gold-futures short-covering buying. That catapulted gold back above its key 200-day moving average on FOMC eve, by the most since mid-June. Gold was a hair away from a decisive 200dma breakout, after escaping its downtrend.
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The FOMC decision itself wasn’t a surprise, with the Fed hiking its federal-funds rate by 50 basis points. That was a sharp slowdown from the streak of monster 75bp hikes executed at its previous four meetings. The FOMC statement was virtually unchanged from its last iteration in early November. With this week’s 50bp hike universally expected, that didn’t faze gold-futures speculators. They focused on something else.
Once a quarter after every other FOMC decision, the Fed releases its Summary of Economic Projections by individual top Fed officials. This is better known as the dot plot, since it shows where they see FFR levels heading in the future. Though notoriously unreliable in predicting where the FFR is actually going according to the Fed chair himself, traders lap that up. This week it proved more hawkish than expected.
The FOMC targets a 25-basis-point range for the FFR, so Fed officials’ projections are at midpoints. In the last dot plot in late September, they collectively predicted 4.63% exiting 2023. That means the FOMC targeting 4.5% to 4.75%. Traders expected that median dot to climb by 25bp to 4.88%, reflecting 4.75% to 5.0%. Instead it surged 50bp to 5.13%, implying a 5.0%-to-5.25% FFR target heading into year-end 2023.
To hit that, the FOMC would have to hike another 75bp after this week’s 50bp. That didn’t seem like a big deal after the Fed’s ultra-aggressive shock-and-awe campaign of 425 basis points since mid-March! A normal rate-hike cycle over those seven FOMC meetings would’ve been 175bp, a quarter point each. So if the Fed really goes 500bp total, 85% of that is already done. And again the dot plot is a terrible predictor.
A year ago after the FOMC’s mid-December-2021 meeting, these same top Fed officials projected a year-end-2022 FFR at just 0.88%! These elite central bankers also thought US GDP would surge up 4.0% this year, while their preferred PCE inflation gauge would climb just 2.6%. They were dreadfully wrong, now seeing the FFR, GDP, and PCE leaving 2022 at 4.38%, a stall-speed +0.5% economy, and raging +5.6% inflation!
Still that mere extra quarter-point projected hike really moved markets. The flagship S&P 500 stock index was up 0.8% heading into that FOMC decision, but plunged to a 0.6% closing loss in the couple hours after. Gold was stable near $1,810 leading into it, right at its prior day’s upleg closing high. Yet despite those hawkish dots, gold merely dropped to $1,799. Spec gold-futures selling was muted for a hawkish surprise!
That was despite these gold-bullying traders’ main cue goading them into dumping more futures. The US Dollar Index swung from about a 0.4% daily loss before the FOMC to a 0.2% gain soon after. That was a sizable rally for the world’s reserve currency. Yet gold soon recovered from that minor 0.6% loss to flat, then only edged 0.1% lower on close. Gold defied the hawkish Fed since futures speculators didn’t dump.
That was even more impressive given the Fed chair’s surprisingly-hawkish press conference a half-hour after that FOMC decision. Jerome Powell didn’t mince words, unloading a double-barreled blast of more hawkish jawboning. In my line of work I listen to all his pressers live, and was amazed to hear him be so aggressive after that epic 425 basis points of federal-funds rate hikes in just 9.0 months! He really piled on.
His word of the presser was “restrictive”. Powell warned “I’ve told you today we have an assessment that we’re not at as restrictive enough stance, even with today’s move.” He led off warning “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 traders had expected Powell to come across as dovish in his remarks after such blistering rate hikes this year, instead he waxed quite hawkish. After past post-FOMC Fed-chair press conferences with hawkish comments, gold has fallen hard on futures selling. Yet this week the yellow metal ignored all that to grind sideways in the FOMC’s wake. That’s very-bullish behavior given that ugly selloff-spawning setup!
While the data cutoff for this essay is Wednesday, I’m writing it on Thursday morning. Gold did weaken overnight, but realize both the Bank of England and European Central Bank did big 50bp hikes early on Thursday New York time. Since the ECB overall wasn’t as hawkish as expected, the euro fell hard boosting the US dollar. That was more responsible for Thursday’s gold-futures selling than the post-FOMC reaction.
Six weeks earlier just after the previous FOMC decision, I wrote a bold contrarian essay arguing that the Fed’s dollar/gold shock was ending. The USDX had soared on the Fed’s monster hikes up to that point, hitting an extreme 20.4-year secular high. That unleashed massive gold-futures selling crushing gold sharply lower. I penned that the day after that last FOMC decision, when gold languished at $1,631 on close.
With gold just 0.5% above its panic-grade late-September low after that fourth monster 75bp FFR hike in a row, my contrarian thesis was ignored. But as this updated chart reveals, I was correct. The USDX crumbled after early November’s FOMC decision, fueling enough big gold-futures short covering to blast gold sharply higher. From FOMC day to FOMC day, the USDX collapsed 7.5% while gold soared 10.5%!
My contrarian thesis six weeks ago with gold on the verge of falling to major new lows was simple. While top Fed officials can spout all the hawkish Fedspeak they want, the FOMC has limited room to hike the FFR. At that point it had done an extraordinarily-extreme 375bp of hiking in just 7.6 months, leaving the target range at a 3.88% midpoint. That wasn’t very far from the dot-plot terminal FFR of 4.63% exiting 2023.
With 375bp already done and another 75bp predicted as of then, fully 5/6ths of this rate-hike cycle had already passed! With not many hikes left, I argued then that “the Fed’s ability to keep shocking the dollar and gold is coming to an end.” I concluded “Their federal-funds rate is nearing terminal-level projections, leaving little room for more hawkish surprises.” That was very bearish for the US dollar and very bullish for gold.
So I continued then, “Without those to keep goosing the parabolic US dollar, it is overdue to roll over hard in massive mean-reversion selling. That weaker dollar will fuel huge normalization buying in gold futures, which have been driven to bearish extremes.” Though few believed that was even possible then, that is exactly what happened since! Gold’s strong performance into and after this week’s FOMC confirms this thesis.
When investors’ interest in gold wanes due to insufficient upside momentum, those hyper-leveraged gold-futures speculators dominate its price trends. The extreme leverage they run enables them to punch way above their weights in bullying around gold. Their trading explains all gold’s volatile price action this year. And it was heavily influenced by the US dollar’s reactions to 2022’s many hawkish surprises from the Fed.
That really started in mid-April after the latest headline CPI inflation print soared 8.5% year-over-year, arguing for more-aggressive Fed rate hikes. The FOMC obliged, catapulting the USDX parabolic into a truly epic 14.3% rally from then into late September! Gold plummeted a brutal 17.9% in that same span, spurred by the USDX’s bullish reactions to hawkish Fed surprises. Enormous gold-futures selling fully drove that.
Speculator gold-futures positioning data is only available weekly as of Tuesday closes, in Commitments of Traders reports. During that 24 CoT-week span where gold plunged mid-year, specs dumped a huge 145.9k long contracts while short selling another 80.0k. That’s the equivalent of a staggering 702.8 metric tons of gold selling, far too much for markets to absorb in that short span! Specs dumped all that they could.
Despite their extreme leverage via futures, their capital firepower is quite limited. By late September as gold carved a deep stock-panic-grade low of $1,623, specs’ total gold-futures longs and shorts were running 0% and 100% up into their past-year trading ranges! That’s the most-bullish-possible near-term setup for gold, indicating probable selling is exhausted leaving room for nothing but big mean-reversion buying.
Heading into that last FOMC meeting in early November, spec gold-futures positioning hadn’t changed much. Total spec longs and shorts were still 4% and 95% up into their past-year trading ranges. Specs still had massive room to buy longs and buy to cover shorts, which would drive gold sharply higher. After the last time spec gold-futures positioning was so extreme in May 2019, gold rocketed up 21.5% in 3.3 months!
So with speculators’ selling capacity largely tapped out and the Fed’s ability to keep hawkishly shocking traders dwindling, gold was due for some serious gold-futures buying. That’s what catapulted gold up 10.5% between these last couple FOMC meetings. Interestingly all that came on the short side of the trade, with specs buying to cover 60.9k contracts in the last five reported CoT weeks or 189.5 GE tonnes.
Still specs’ short-covering buying isn’t finished, as last Tuesday their shorts were still 30% up into their past-year range. That should fall near zero before they are done buying, so about a third of that short covering is still coming. Gold’s strong performance after early November’s hawkish FOMC meeting and it again defying this week’s hawkish encore makes leveraged gold-futures short selling a heck of a lot riskier!
So specs are naturally losing their enthusiasm for it. But the reason I’m writing this essay is what has happened on the long side. Since early November, as of the latest-reported CoT week total spec longs have actually slumped 5.6k contracts despite gold surging sharply higher! That is 17.6t of gold-equivalent selling counter to gold’s young mean-reversion rally. Spec longs remain just 4% up into their past-year range!
Shockingly as of last Tuesday, total spec longs were just 0.7% above their late-September levels when gold bottomed near $1,623! That was despite gold being much higher at $1,772 that day. Virtually no long-side buying yet is super-bullish for gold. Spec longs are proportionally more important than shorts, since longs outnumbered shorts by an average of 1.9x over this past half-year. Big long buying is still coming.
To return to mid-April levels before the Fed’s hawkish surprises launched the US dollar stratospheric, the gold-futures specs would have to buy a staggering 144.2k long contracts! And they still have room for yet another 13.8k of short-covering buying. That adds up to 491.5t of gold-equivalent buying likely in the next few months, dwarfing that 189.5t of short-covering buying so far! That would powerfully accelerate gold’s upleg.
With gold now defying Fed hawkishness to surge higher between these latest FOMC meetings, specs are going to get more interested on betting for more gold upside. Their buying will feed and amplify that, fueling a virtuous circle of capital inflows. Gold uplegs have three stages, starting with gold-futures short covering, extending to gold-futures long buying, which eventually entices in vastly larger investment buying.
We are about 2/3rds of the way through stage one, and stage two hasn’t even started yet! Gold’s young-upleg gains could easily double to triple over the next half-year or so as speculators return to longs to normalize their excessively-bearish bets and investors follow. The biggest beneficiaries of a major gold upleg underway will be the gold miners’ stocks. They are already surging as this updated chart shows.
I analyzed this in depth in last week’s essay on gold stocks surging back. The red line is gold, while the blue line is gold stocks’ leading benchmark the GDX VanEck Gold Miners ETF. At best between its own panic-grade late-September lows and early December, GDX has already surged 37.4% higher! That has already amplified gold’s own parallel gold-futures-buying-fueled mean-reversion upleg by an excellent 3.2x.
But this young gold-stock upleg is only getting started if gold continues powering higher on big spec gold-futures buying. Back in mid-April before all this Fed-hawkish-surprise carnage in gold, GDX was trading up near $41. To return to those modest levels alone would mean another 37.9% rally from this week’s FOMC-day close. And as I discussed in last week’s essay, gold stocks’ upside potential is far bigger than that.
All this matters because cultivating excellent contrarian information sources is essential to thriving in the markets! If you follow the mainstream herd in buying and selling, you’ll be doomed to buy high as greed reigns after major surges then sell low as fear returns after serious selloffs. Doing it the right way by first buying low during fear then later selling high in greed requires fighting the crowd, which is challenging to master.
For 20+ years now we’ve published a couple contrarian newsletters to help speculators and investors do just that. While I was writing those essays on gold bottoming including that controversial early-November one on the Fed’s dollar/gold shock ending, 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.
Their gains are already trouncing the major gold miners dominating GDX, like usual. As of FOMC eve this week, we had unrealized gains in our recent newsletter trades running as high as +73.7%! The only way to maximize your odds of buying low then selling high is analyzing the markets with a contrarian bent. That means doing extensive research to identify probable trend changes before the herd realizes they are happening.
The bottom line is gold is continuing to defy a hawkish Fed. After blasting higher since the last FOMC meeting, gold held strong after this week’s. Despite the dot plot calling for more rate hikes than expected and a really-hawkish Fed-chair presser, material gold-futures selling didn’t erupt. Gold’s surge has left it too risky to resume leveraged shorting, while speculators’ long-side capital firepower for selling is exhausted.
Gold’s young mean-reversion upleg is likely to grow much larger in coming months as specs continue to normalize their excessively-bearish bets. They have about a third of their likely short-covering buying left, as well as all their much-larger long-side buying! Specs are now realizing the Fed’s ability to hawkishly surprise is ending, with most of this extreme rate-hike cycle passed. That’s super-bullish for gold and its miners.
(By Adam Hamilton)