ゴールド上昇は奇妙だ by Zeal

先週の記事です。最後の２段落だけ訳をいれておきます。

Gold’s Peculiar Surge
Adam Hamilton     February 21, 2020     3246 Words

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 QE4 Treasury 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.

Running extreme leverage means bearing extreme risks.  At 30x, a mere 3.3% gold move against specs’ bets would wipe out 100% of their capital risked!  There aren’t many traders brave or crazy enough to live on that razor’s edge, so their collective gold-futures bets are finite.  Once these guys have bought all the gold futures they can, their capital firepower to buy more is exhausted.  That caps gold’s upward momentum.

An easy way to visualize this extensive data is in gold-bull-trading-range terms.  Speculators’ total longs and shorts, upside and downside bets on gold, can be considered relative to where they have been so far in gold’s secular bull which began in mid-December 2015.  The most-bullish-possible setup for gold is 0% longs and 100% shorts, meaning specs have vast room to buy by adding new longs and buying to cover shorts.

The most-bearish-possible setup for gold is the opposite, specs positioned at 100% longs and 0% shorts.  That reveals their capital firepower for buying is tapped out.  They have bought all the longs they are likely able to, and have covered all the shorts they are likely to.  That leaves gold at risk of big selling, as gold-futures contracts are legally required to be unwound through opposing trades that close those positions.

Early last September when this gold upleg originally peaked at $1554 and gold stocks were higher than today, total spec gold-futures longs and shorts were running 96% and 8%.  Their buying was pretty much exhausted, leaving an ominous gold-futures-selling overhang which I warned about at the time.  Indeed gold started to correct, slumping 6.4% over the next 2.7 months into late November.  That was really mild.

This gold bull’s prior couple corrections averaged much-larger 15.5% selloffs over 6.0 months.  Then oddly on Christmas Eve, a throwaway half-day trading session, gold surged to a breakout above its correction downtrend.  That was before the US-Iran conflict flared and went kinetic, and well before coronavirus was even mentioned in the media.  By New Year’s Eve, gold had powered 2.2% higher in just 5 trading days.

That breakout rally was fully explainable by spec gold-futures buying, which totaled 21.8k and 26.1k contracts in the couple of CoT weeks ending that day.  That had catapulted spec longs to a new all-time-record high of 442.6k contracts, while spec shorts fell to a gold-bull low of 76.1k.  So entering 2020, spec gold-futures positioning was literally running at that most-bearish-possible 100% longs and 0% shorts!

These guys were out of buying firepower.  And indeed over the 6 reported CoT weeks since New Year’s Eve, total spec longs haven’t gone materially higher and spec shorts haven’t gone lower.  Spec longs have ranged between 100% to 89%, while spec shorts have been running 0% to 7%.  So the usual spec gold-futures buying that explains normal gold uplegs has been far too small to fuel 2020’s big gold surge.

But there’s a potential caveat on that.  The weekly CoT reports detailing specs’ gold-futures positioning are current to Tuesday closes, but not published until late Friday afternoons.  So the last CoT report I’ve seen before this essay was published was current to Tuesday February 11th when gold was trading at $1568.  At that point total spec longs and shorts were running 90% and 2% up into their gold-bull trading ranges.

Over the latest CoT week ending this Tuesday where gold soared 2.2% to $1602, odds are that was driven by big gold-futures buying.  I suspect late today we’ll see total spec longs near or exceed early January’s all-time-record high of 444.0k contracts.  And spec shorts will probably slump to new bull lows.  But at least from $1517 gold on New Year’s Eve to $1568 last week, spec gold-futures buying didn’t explain it.

On the contrary with total spec longs and shorts near that most-bearish-possible for gold of 100% and 0% this year, gold faced way-higher odds of a major selloff than a big surge higher.  I’ve looked, and haven’t found another example in modern history where gold surged to major new highs without any apparent material spec gold-futures buying.  These guys dominate gold’s price action with the huge leverage they wield.

That’s certainly peculiar, but gold has another primary driver of investment demand.  Unfortunately that’s a lot harder to measure than gold-futures trading.  The best data on global investment demand comes from the World Gold Council, and it is only published quarterly.  The WGC’s latest Gold Demand Trends report covering Q4’19 was released a few weeks ago, and it is essential reading for everyone interested in gold.

While it is gold’s Q1’20 surge that is odd, the context provided by hard Q4’19 world investment numbers is very relevant.  While gold slumped into that small correction mid-quarter, its subsequent breakout at the end of December left it with decent 3.0% Q4 gains.  Gold investment looked relatively stable according to its leading daily proxy, the gold-bullion holdings held by the dominant GLD SPDR Gold Shares gold ETF.

They only slumped 3.0% or 27.6 metric tons in Q4’19, which is pretty mild.  GLD’s holdings made it look like investors were holding their ground as gold consolidated high, a sign of strength.  But boy the WGC’s quarterly numbers sure shattered that sanguine view.  Overall world gold investment demand actually plummeted a staggering 33.0% year-over-year in Q4’19 according to the WGC!  That is brutal, seriously ugly.

The WGC splits overall investment demand into two subcategories, physical bars and coins and ETFs.  The physical side dropped 15.7% YoY to 240.6t, while the ETF side cratered as colossal 76.4% YoY to just 26.8t!  Even central banks, which are like gold investors but have their own separate category entirely, saw gold buying falling 33.8% YoY to 109.6t.  All that forced total world gold demand lower last quarter.

It dropped 19.3% YoY or 249.8t from Q4’18 levels.  And the 131.6t decline from investment and 56.0t from central banks accounted for 3/4ths of that overall drop!  So global gold investment demand leading into Q1’20 was exceptionally weak, there was no momentum at all.  That may have turned on a dime this quarter, but we won’t know until the next WGC Gold Demand Trends report for Q1’20 due out by early May.

Again GLD’s holdings are the best daily proxy for global gold investment demand.  This American ETF is the primary conduit used by American stock investors to move capital into and out of gold.  According to the WGC, GLD’s holdings alone at the end of Q4 accounted for about 31% of all the gold held by all the world’s gold ETFs.  Its next biggest competitor was only near 12%, GLD is the juggernaut of gold ETFs.

This next chart looks at GLD’s holdings superimposed on gold during this secular gold bull.  And they can’t explain gold’s stunning surge back over $1600 this year either.  In past quarters where gold has made major moves higher, GLD dominated global gold demand.  Case in point is Q1’16 and Q2’16 when this gold bull’s maiden upleg was underway.  GLD’s holdings soared 27.5% and 16.0% higher those quarters!

When American stock investors buy GLD shares faster than gold is bought, this ETF’s share price threatens to decouple from gold to the upside.  So GLD’s managers issue new shares to offset that excess demand, and plow the capital raised into buying physical gold bullion.  In Q1’16 and Q2’16, the massive 176.9t and 130.8t GLD-holdings builds alone accounted for 88% and 102% of total global-gold-demand growth!

Back in September when gold’s upleg initially peaked at $1554, GLD’s holdings followed several weeks later at 924.9t.  From there they drifted lower on balance into mid-January, falling 5.5% to 874.5t after Iran’s attack on US-used airbases in Iraq in response to the US assassinating Iran’s top general.  But gold still rallied 3.7% over that span, not driven by investment buying but late-December’s huge gold-futures buying.

Then GLD’s holdings started growing again, showing American stock-market capital flowing back into gold.  By this Wednesday they had climbed 6.5% to 931.6t, a new upleg high.  But that is still only 0.7% over late-September’s initial-peak levels, despite gold powering 7.1% higher over that 4.8-month span.  Identifiable gold investment demand per GLD’s holdings has been far too weak to explain gold’s $1600+ surge.

In normal gold uplegs, big-GLD-build days push gold proportionally higher.  Stock investors are buying GLD shares faster than gold is being bought, forcing that ETF to issue new shares and use the proceeds to buy gold bullion.  In early September when this gold upleg was initially peaking for example, back-to-back 1.3% and 0.7% GLD-holdings-build days helped drive proportional 1.4% and 0.6% daily gold rallies.

Incidentally around that same 0.7% is where a daily GLD-holdings build becomes sizable.  So far since GLD’s mid-January holdings low, there have been 3 sizable GLD-build days.  They were a massive 2.2% on January 17th, 1.0% on February 4th, and 0.7% on February 11th.  Those 3 days alone saw 34.8t of GLD builds, or over 6/10ths of its total recent build.  But they too proved peculiar like much of this gold surge.

On those 3 big-GLD-build days where its holdings surged 2.2%, 1.0%, and 0.7%, gold’s price first merely climbed 0.2%, second plunged 1.5%, and third slipped 0.3%.  When big-GLD-build days don’t see gold enjoy proportional rallies like usual, they don’t signal big investment buying.  Big gold underperformance on such days means American stock investors weren’t selling GLD shares as fast as gold was being sold.

When specs dump gold futures faster than GLD shares are being sold, the latter’s price threatens to decouple to the upside by not falling as fast as gold.  GLD’s managers have to step in and equalize that supply differential to maintain tracking.  So they issue enough new GLD shares to push its price down in proportion with gold, and use the money raised to buy more gold bullion.  Such days aren’t a bullish omen.

This GLD-holdings chart shows that all this gold bull’s past uplegs including the current one to its original early-September peak were driven by big sustained differential GLD-share buying.  Gold needs to see big investment-capital inflows to fuel major uplegs.  Yet gold’s surge so far this year has happened without those inflows being substantial according to GLD’s holdings.  That adds to the peculiarity of gold’s breakout surge.

Experienced traders are hesitant to get excited here because gold’s recent move higher doesn’t tick any of the usual major-upleg boxes.  Gold-futures specs haven’t been materially buying, at least before this latest CoT week current to this Tuesday.  And investors haven’t been materially buying either, at least per GLD’s holdings.  Its recent build is small, and the lion’s share came on a few days when gold was very weak.

So what the heck is going on here?  My best guess after decades of intensely studying and actively trading gold and its miners’ stocks is Asian investment buying has exploded on that COVID-19 plague.  That isn’t readily quantifiable, but is sometimes evident when most of gold’s daily gains happen overnight in the US when Asian markets are open.  Some of gold’s recent sizable daily rallies indeed came during those hours.

In those cases, the subsequent US-market action merely held on to those Asian gains.  But adding to the mystery of all this, there have also been plenty of trading days this year where gold was flat overnight in Asian trading but then got bid higher when the US was open.  Watching 24-hour gold price charts daily is essential in trying to determine where gold buying is coming from, which can really affect its sustainability.

With COVID-19 rapidly spreading in Asia, those investors really should be buying gold.  If the infection rate is as high as anecdotal reports and that whole cruise-ship-quarantined-in-Japan episode suggest, this virus is going to explode no matter how governments try to suppress it.  But historical Asian gold-demand data is so sparse and fragmented I don’t know how to game whether that buying is likely sustainable.

Can this stealth demand keep gold rallying while gold-futures speculators can’t buy and are likely to sell hard to normalize their excessively-bullish bets?  Can it prevent gold from correcting when investment demand looks anemic at best according to its leading daily proxy GLD’s holdings?  Only time will tell, but the major peculiarities of this year’s gold surge mean caution remains in order.  This isn’t a normal gold upleg!

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The bottom line is gold’s surge this year has been very peculiar.  It mostly hasn’t been driven by gold’s usual dominant primary drivers of gold-futures buying and investment capital inflows.  The gold-futures specs have been largely fully deployed continuously, their buying firepower tapped out.  And investors haven’t been materially buying either per their leading daily proxy.  GLD’s holdings only rose modestly.

要約すると、今年のゴールド急騰はとても奇妙なものだ。通常はゴールド価格変化の主要因である先物や投資家の資金流入によるものではなかった。先物投機筋はすでに全力展開を継続しており、買い余力は尽きている。またGLDを見る限りは投資家もそれほど買い進んでいない。GLD保持高の増加は穏やかなものだ。

While $1600+ gold is certainly exciting, gold needs sizable sustained capital inflows to keep powering higher in major uplegs.  If that can’t come from exhausted gold-futures traders, and isn’t coming from normal gold-investment channels, gold’s staying power up here is questionable.  Asian gold investment demand on coronavirus fears is likely what has forced gold higher, but it is unclear how long that will persist.

ゴールドが＄１６００超というのは確かに興奮するが、大きな上昇を維持するにはかなりな資金の持続的な流入が必要だ。先物投機筋の資金が尽き果て、またいつものゴールド投資チャネルも尽き果てるなら、現在のゴールド高値維持は疑問だ。コロナウイルス恐怖によるアジアのゴールド投資がゴールドを持ち上げている可能性が高い、しかしこれがどれだけ持続するかは不透明だ。

Adam Hamilton, CPA     February 21, 2020     Subscribe