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Gold Gears Up for Breakout as Speculator Sentiment Reaches Turning Point

Gold has drifted out of favor in recent months, overshadowed by the glitzy AI stock-market bubble. Yet technically gold is holding its own, consolidating high just under nominal records. Gold has merely pulled back mildly despite heavy gold-futures selling, impressively resilient. Speculators’ frenzied long dumping has fully reloaded their buying capital firepower, portending big gold gains as they normalize positioning.

Since late November, gold has generally ground sideways in a tight trading range mostly between $2,000 to $2,050. Earlier in this high-consolidation span, gold’s young upleg born in early October achieved this metal’s first new nominal record high in 3.3 years! By late December, gold had powered 14.2% higher in 2.7 months. Big gold-futures buying fueled that, on a weakening US dollar as Fed-rate-cut odds mounted.

But with traders expecting more than double the rate cuts this year than top Fed officials projected in mid-December, they started pushing back. Between Fedspeak, FOMC decisions, and major-economic-data upside surprises, futures-implied rate-cut odds were driven back down. In mid-January traders expected 170 basis points of cuts this year, but by mid-week that had collapsed to 89bp not far from Fed officials’ 75bp!

Perceived Fed rate odds are the US dollar’s dominant driver. Currency traders bid it up when they expect the Fed to either hike its federal-funds rate, keep rates higher for longer, or cut less. And because gold-futures speculators look to the US dollar’s fortunes for their primary trading cues, the dollar throttles gold. So as the benchmark US Dollar Index rallied in January and February on falling rate-cut odds, gold sold off.

Gold’s sentiment-rebalancing retreat proved very mild, merely 4.2% at worst in mid-February. Normally that wouldn’t be big or sharp enough to quickly bleed off greed or ramp bearishness. But gold’s sentiment shift was exacerbated by US stock markets’ stunning advance. During the past month or so, the flagship S&P 500 has achieved 11 new record closes! Capital is flooding into the Magnificent Seven mega-cap techs.

Gold has always been an alternative investment, the classic portfolio diversifier. Investors forget about the wisdom of maintaining small gold allocations when surging, lofty stock markets are generating major greed and euphoria. So investors have been increasingly fleeing gold in the last few months, presumably to chase this AI stock-market bubble. Entering February, the elite S&P 500 stocks averaged 30.6x TTM P/Es!

Gold’s appeal always wanes during stock-market manias, overshadowed by the great excitement they generate. But inevitably those overvalued and overbought stock markets decisively roll over to face their mean-reversion reckonings. Then investors start remembering their stock-heavy portfolios need to be diversified, and gold begins returning to favor. We aren’t there yet, but gold futures are reloaded and ready.

This chart superimposes gold over speculators’ total gold-futures long and short contracts over the last few years or so. Their positioning is reported weekly in the Commitments of Traders reports. Gold’s major uplegs and corrections are marked, along with specs’ net buying and selling of longs and shorts during those exact spans. Speculators’ leveraged gold-futures trading usually dominates gold price trends.

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