Best of the Week
Most Popular
1.US Paving the Way for Massive First Strike on North Korea Nuclear and Missile Infrastructure - Nadeem_Walayat
2.Trump Reset: US War With China, North Korea Nuclear Flashpoint - Video - Nadeem_Walayat
3.Silver Junior Mining Stocks 2017 Q2 Fundamentals - Zeal_LLC
4.Soaring Inflation Plunges UK Economy Into Stagflation, Triggers Government Pay Cap Panic! - Nadeem_Walayat
5.The Bitcoin Blueprint To Your Financial Freedom - Sean Keyes
6.North Korea 'Begging for War', 'Enough is Enough', is a US Nuclear Strike Imminent? - Nadeem_Walayat
7.Bitcoin Hits All-Time High and Smashes Through $5,000 As Gold Shows Continued Strength - Jeff_Berwick
8.2017 is NOT "Just Another Year" for the Stock Market: Here's Why - EWI
9.Gold : The Anatomy of the Bottoming Process - Rambus_Chartology
10.Bitcoin Falls 20% as Mobius and Chinese Regulators Warn - GoldCore
Last 7 days
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17
Q4 Pivot View for Stocks and Gold - 14th Oct 17
Gold Mining Stocks Q3’17 Preview - 14th Oct 17
U.S. Mint Gold Coin Sales and VIX Point To Increased Market Volatility and Higher Gold - 14th Oct 17
Yuan and Gold - 14th Oct 17
Tips for Avoiding a Debt Meltdown - 14th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Gold Defies Stocks Bear Market Rally

Commodities / Gold and Silver 2016 Apr 08, 2016 - 05:27 PM GMT

By: Zeal_LLC


Gold has spent much of the past couple months consolidating, vexing traders and bleeding away most of early 2016’s enthusiasm that catapulted the yellow metal higher.  But this sideways grind has actually been a very impressive show of strength.  Gold managed to hold its massive gains despite an incredible stock-market rally, which can really sap gold investment demand.  This portends another major gold upleg.

Gold’s performance this year has been nothing short of remarkable.  This unique portfolio-diversifying asset that tends to move counter to stock markets was universally loathed as recently as December.  It actually fell to a 6.1-year secular low the day after the Fed’s first rate hike in 9.5 years.  The vast majority of investors scoffed at gold, believing it was doomed to spiral lower indefinitely with the Fed tightening.

But such popular antipathy was a dream come true for hardened contrarians who really strive to buy low.  With gold hated, the sellers had already sold and its price was way too low relative to its worldwide supply-and-demand picture.  On New Year’s Eve when gold closed slightly above that secular low at $1060, I published an essay “Fueling Gold’s 2016 Upleg” arguing “a mighty new gold upleg in 2016” neared.

And indeed that soon came to pass.  Fed-rate-hike cycles are actually very bullish for gold historically, contrary to the bearish hype surrounding that first rate hike.  The Fed has executed 11 cycles of 3 or more consecutive rate hikes since 1971, and gold’s average gain throughout all of them was 26.9%.  In the 6 where it rallied, the more gradual ones launching with gold near major lows, it soared 61.0% on average!

During the last Fed-rate-hike cycle between June 2004 and June 2006, gold powered 49.6% higher.  This was despite the Fed hiking 17 consecutive times totaling 425 basis points, more than quintupling its federal-funds rate to 5.25%!  So late last year’s popular notion among futures speculators that gold was going to get slaughtered in a rate-hike cycle was utterly ridiculous in light of all historical precedent.

With the dominant bearish-gold theory staked, there was no reason not to be heavily long.  Gold started rallying right out of the gates in January as the Fed-levitated US stock markets began selling off.  The deeper that selloff grew, the more investors returned to left-for-dead gold.  Falling stock markets made them finally remember the millennia-old wisdom of prudent portfolio diversification using the yellow metal.

All this culminated with gold soaring 17.5% in the first 6 weeks or so of 2016 while the flagship S&P 500 stock index plunged 10.5%.  The false belief carefully cultivated by central bankers in recent years that they can engineer stock markets to rise indefinitely without material selloffs was starting to implode.  So even American stock investors defied their endless Wall Street anti-gold training to flock back to gold.

This was evident in the holdings of the world-leading GLD gold ETF.  They surged by 11.5% during that initial 6-week stock-market selloff.  Stock investors hadn’t bought gold so aggressively since early 2009, in the early months of a massive gold bull market.  Naturally gold excitement was really growing, since everyone loves a winner.  But then in mid-February, that major stock-market selloff reversed into a rally.

That stock buying quickly accelerated and drove a gigantic rally that was still forging new highs last week.  With stock markets surging, the perceived need to diversify portfolios away from being all-stocks largely evaporated.  Thus gold started falling out of favor again, as recent years’ dominating buy-stocks and sell-gold psychological paradigms came roaring back.  This could very well have crushed gold.

But it didn’t!  Gold defied what is almost certainly a bear-market rally in general stocks, by consolidating high and holding its strong early-year gains.  This first chart looks at the gold price superimposed over the benchmark S&P 500 (SPX) over the past 15 months or so.  Gold’s resilience and even progress in the face of an exceptional stock-market rally that was a major threat to gold’s sharp gains was amazing.

Between mid-February and early April, the SPX rocketed 13.3% higher in just 7 weeks!  That made for one of the biggest intra-quarter recoveries the US stock markets have ever witnessed.  Working with Dow 30 data since its history extends back much farther than the S&P 500’s, researchers at a company called did a fascinating study on intra-quarter rebounds.  They started way back in 1900.

It turned out Q1’16 was only the fourth quarter since 1900, out of 465 calendar quarters, where the US stock markets finished positive after falling 10%+ within a quarter.  So the rally we saw in the second half of Q1’16 was extreme and exceptional.  This study dug deeper, expanding intra-quarter rebounds to recovering 8%+ after a 10%+ intra-quarter selloff.  That happened 26 other times since 1900 in the Dow 30.

Here’s the kicker.  It turns out that fully 24 of those 26 massive intra-quarter rebounds happened within secular bear markets!  There are near-certain odds what we just witnessed was a bear-market rally.  The reasons a new stock bear is awakening are legion, and the technical profile of that surge just happened to perfectly match that of bear-market rallies.  It erupted sharply in fear off major lows fueled by short covering.

But as that short covering petered out, the pace of the surge moderated in anemic low-volume up days.  There was little buy-side conviction, with serious asymmetry between the high volume of the preceding major selloff and fading volume of the subsequent sharp rally.  It perfectly executed the mission of bear-market rallies, to eradicate the excessive fear at recent selloff lows and rekindle widespread complacency.

Even at this bear-market rally’s apex last Friday, the SPX was still seeing a long series of lower highs since its all-time record peak late last May.  The stock markets have been rolling over on balance for almost an entire year now, their lower highs and lower lows forming a powerful technical downtrend.  Such developments simply aren’t seen in bull markets, the Fed-distorted stock-market cycles have finally turned.

Nevertheless, this enormous stock-market rally radically changed investors’ psychology from those mid-February lows.  Instead of being fearful of more selling to come, they’ve once again come to believe that everything is awesome and there’s nothing but smooth sailing ahead for stocks.  Wall Street analysts have led this bullish-sentiment charge, almost universally calling for 2016 to see double-digit SPX gains.

So naturally with gold prices tending to move counter to stock-market levels, this huge sentiment shift among investors is certainly hostile to gold investment.  Why diversify with gold if stocks are poised to yet again rally indefinitely courtesy of super-easy central banks worldwide?  This same Pollyannaish stock-market psychology that pervaded 2013 to 2015 could very well have driven a major gold selloff.

Gold was certainly overbought on a short-term basis after rocketing higher into mid-February.  And the Wall Street rhetoric attacking this unpopular asset was as bearish as ever.  But gold didn’t collapse or even correct, instead it merely consolidated high while the stock markets surged!  During the exact span of that mighty 13.3% SPX bear-market rally, gold merely slipped 1.9%.  That is absolutely remarkable.

After soaring $186 between New Year’s Eve and the day the SPX bottomed in mid-February, gold had only given back $24 by the SPX’s bear-market-rally peak last Friday.  That’s just 1/8th of early 2016’s outsized gains!  Gold held on to 7/8ths of its progress even when all the sentiment cards were heavily stacked against it.  As if that’s not bullish enough, this metal even advanced within this high consolidation.

In early March as over 2/3rds of the typically-front-loaded SPX bear-market rally had already happened, gold shot up to a 20.1% gain off its mid-December secular low.  That surpassed the 20% threshold for a new bull market!  Gold hadn’t been in an advancing bull market since 2011, so this milestone marked a major secular reversal.  A week later, gold’s total bull gain extended to +21.0%, decisively across that marker.

So gold not only consolidated high and held the vast majority of its huge early-year gains as the stock markets surged, it continued advancing and entered its first bull market in many years!  Such relative gold strength in the face of such a gigantic stock-market rally slaughtering contrarian sentiment is well beyond anything gold investors could’ve hoped for.  Gold resolutely defied a powerful stock bear-market rally!

How did this happen?  If you’d have asked even gold enthusiasts back in mid-February how gold would fare if the stock markets were soon going to soar 13%+ to take the SPX within less than 3% of its all-time record high, they would’ve universally said lousy.  And after central-bank-levitated stock markets gutted gold investment demand in recent years, that was certainly the high-probability bearish outcome for gold.

But gold investors didn’t fold as widely expected, they weathered the storm of complacent stock-market sentiment to not only maintain their new gold positions but aggressively add to them.  They championed gold, rallying to its support.  Nowhere is this more evident at this point than in the gold-bullion holdings of the world flagship GLD SPDR Gold Shares gold ETF.  It offers the best daily window into gold investment.

In addition to being one of the only records of daily capital flows into physical gold bullion, GLD towers over the rest of the world’s gold ETFs.  As of the end of Q4, the World Gold Council reported that GLD’s holdings represented over 40% of all gold ETFs’.  And the next biggest competitor was under 10%, so GLD is unchallenged.  GLD’s holdings reveal why gold was so strong in defiance of that stock bear-market rally.

This last chart looks at GLD’s physical gold-bullion holdings held in trust for its shareholders, rendered in metric tons.  They are reported every trading day, effectively showing gold investment by American stock traders.  Each monthly draw or build in GLD’s holdings is noted, in both percentage and tonnage terms.  All this GLD-holdings data is again superimposed over the S&P 500, highlighting its sharp surge.

GLD’s physical gold-bullion holdings have skyrocketed in 2016, particularly in February.  That month alone saw GLD add 108.0 tonnes of gold, growing its holdings by 16.1%!  This was an extraordinary build, the biggest in absolute tonnage terms since May 2010 and the biggest in percentage terms since February 2009.  That was early in a major bull market that would see gold power 166.5% higher in 2.8 years.

And that strong gold investment buying didn’t falter as the SPX’s bear-market rally rocketed higher.  In the exact span of that 13.3% stock-market surge, GLD’s holdings actually blasted 14.3% higher!  Stock investors not only didn’t flee gold, but they aggressively added to their positions as complacency in the stock markets soared.  It was this heavy investment buying that drove gold’s strength, without any doubt.

GLD’s mission is to track the price of gold.  But GLD shares have their own unique supply-and-demand profile totally independent from gold’s.  So the only way GLD can mirror the gold price is by actually acting as a conduit for stock-market capital to flow into and out of gold.  Excess buying or selling pressure on GLD shares must be equalized directly into gold bullion, or else GLD’s price would decouple from gold’s price.

When GLD’s holdings are rising, stock-market capital is flowing into gold.  Differential buying pressure on GLD shares is pushing them up faster than gold is climbing, threatening GLD to fail its tracking mission to the upside.  So its managers issue enough new GLD shares to offset this excess demand.  They then plow the proceeds from these sales directly into physical gold, which boosts GLD’s gold-bullion holdings.

From New Year’s Eve to the stock markets’ mid-February low, stock investors’ differential buying of GLD shares forced this ETF to buy 73.6t of gold.  That was the most seen in years, and it all could’ve been unwound as the stock markets surged higher.  But during the subsequent bear-market rally where the SPX surged 13.3%, stock investors actually stepped up their buying forcing GLD to add another 102.1t!

Gold defied stocks’ bear-market rally because American investors continued aggressively buying GLD shares despite the fierce sentiment headwind from surging stock markets.  Despite Wall Street’s tired old self-serving and false message that all portfolios need are stocks and bonds, investors not only kept on diversifying into gold but accelerated their buying.  Their capital inflows enabled gold to consolidate high.

And this new massive gold investment buying is exactly what makes 2016’s gold rally so incredibly bullish.  Gold had seen a half-dozen major rallies between 2013 and 2015 as the stock markets levitated thanks to the Fed’s zero rates, money printing, and jawboning about more easing.  But all were just fueled by American futures speculators primarily covering their hyper-leveraged shorts, which soon exhausted itself.

When speculators stopped buying gold futures, gold’s rallies all fizzled out because there was little investment buying.  Gold rallies can’t transition into bull markets unless investors, with their vastly-larger pools of capital, little or no leverage, and long time horizons take the gold-buying baton from the futures speculators.  2016 is the first time gold has enjoyed major investment buying since way back in 2011!

And it’s not just American stock investors buying GLD shares.  When the World Gold Council releases its latest Gold Demand Trends report for Q1’16, the most-comprehensive read on global gold supply and demand available, world gold investment demand will certainly have exploded higher.  GLD is merely a handy proxy for overall gold investment demand since its gold-bullion holdings are published daily.

If American stock investors kept on aggressively adding gold to their portfolios in the past 7 weeks or so even as the stock markets surged and complacency soared, imagine how their buying will intensify and accelerate as this stock bear-market rally inevitably rolls over!  Just like in early February, falling stock markets will ignite massive new gold demand from legions of investors who’ve neglected diversification.

The SPX’s bear-market rally extended so far in March because it was artificially goosed by dovish talk and actions from central banks no fewer than 4 separate times as it was losing momentum.  There was a dovish regional-Fed-president speech in China as March dawned, a bazooka-sized European Central Bank easing a week or so later, then a surprisingly-dovish FOMC meeting, and finally a dovish Yellen speech.

With a big lull in major central-bank meetings now and Q1’16’s earnings season upon us, which is expected to be terrible with SPX component-company profits falling 8% YoY, odds are this exceptional bear-market rally is already giving up its ghost.  As stock markets start sliding decisively again, there is no doubt 2016’s strong gold investment demand will grow and spread.  This will fuel a major new gold upleg.

So gold is now poised to surge again in a major spring rally, right in line with its bull-market seasonals.  Investors and speculators can position for this young bull market’s next major upleg in physical bullion or GLD shares, or GLD call options.  But as always, the biggest gains by far will come in the stocks of the gold miners.  They recently fell to fundamentally-absurd secular lows, and their profits greatly leverage gold’s gains.

While gold stocks have soared so far in 2016 trouncing the performance of every other sector, their baby bull remains tiny.  They still have vast room left to rally merely to mean revert to normal levels relative to gold, which of course drives their profits and hence ultimately stock prices.  The gold stocks will keep on far outperforming gold as investment capital continues to return to gold and fuel its next major upleg.

Finding the best of the gold stocks to invest in certainly isn’t easy, but we’ve spent 16+ years studying and trading this high-potential contrarian sector at Zeal.  This unparalleled knowledge and experience has fueled many hundreds of gold-stock and silver-stock trades over the years, which have multiplied our subscribers’ wealth.  Few people in the world have spent more time immersed in this realm than we have.

That’s why you need our vast expertise in your corner.  We’ve long published acclaimed weekly and monthly contrarian newsletters.  They draw on our unequalled experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks.  Our extensive trades added in recent months already have big unrealized gains running up to 150%+!  You can learn to think, trade, and thrive like a contrarian for only $10 per issue thanks to our 20%-off sale.  Subscribe today and get deployed before gold’s next upleg erupts!

The bottom line is gold utterly defied the massive bear-market rally witnessed in the stock markets since mid-February.  Despite soaring complacency, investors kept on aggressively buying gold to continue diversifying their stock-heavy portfolios.  This pushed gold into its first new bull market in years right in the midst of the stock-market surge, and kept the yellow metal beautifully consolidating high on balance.

And if gold investment demand is already accelerating despite that fierce sentiment headwind from bullish stock-market psychology, it’s going to explode again as stock markets inevitably roll over and head lower again.  Nothing fuels gold investment demand like bear markets in stocks, since gold moves counter to stock markets.  Both the stock-market bear and gold’s new bull have only barely begun.

Adam Hamilton, CPA

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research. Please consider joining us each month for tactical trading details and more in our premium Zeal Intelligence service at …

Questions for Adam? I would be more than happy to address them through my private consulting business. Please visit for more information.

Thoughts, comments, or flames? Fire away at . Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I will read all messages though and really appreciate your feedback!

Copyright 2000 - 2015 Zeal Research ( )

Zeal_LLC Archive

© 2005-2017 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife