Gold Defied Spent Dollar

Adam Hamilton, CPA

Gold has been grinding sideways for the better part of several months now, weighing on sentiment.  Late October’s mounting bullishness is long-gone, deteriorating to apathy.  But gold’s recent high consolidation is actually a remarkable show of strength, defying a massive US-dollar rally.  Such big-and-fast gains on a higher Fed rate trajectory have mostly exhausted the dollar’s upside, paving the way for gold to surge again.

Gold’s last major interim high was $2,786 in late October, capping a monster upleg with 53.1% gains in 12.9 months!  That powerful bull run included 43 nominal record closes, making for a truly-remarkable 2024.  That peak happened to be a week before the US elections, where Trump’s decisive victory surprised many traders.  Since Election Day, gold has meandered within a trading range from $2,562 to $2,717.

That is pretty darned impressive, as that mid-November nadir merely represented an 8.0% pullback!  Typically sentiment-rebalancing selloffs after uplegs are proportional, so a larger correction in the higher teens would’ve been fully justified.  Midweek, gold remained only 3.2% under that late-October high.  Even considered in isolation, such resiliency is amazing after October’s extremes warning of a sharp selloff.

Yet gold’s high consolidation happening while the US dollar soared is extraordinary.  That world reserve currency’s leading benchmark is the US Dollar Index, which will celebrate its 52nd birthday in March!  The USDX uses a basket of six major currencies to track the dollar’s value, primarily the euro with a 57.6% weighting.  During that mostly-post-election span where gold slumped 3.2%, the USDX surged 4.8% higher.

By major-currency standards, that’s a huge move compressed into a relatively-short period of time.  And shockingly it’s actually part of a much-larger 9.4% USDX rally from late September to mid-January!  The US dollar hasn’t enjoyed such strong gains since mid-2022, during the most-violent rate-hiking cycle in the Fed’s history.  And back then the dollar’s similar blistering surge eviscerated gold, slamming it way lower.

Gold’s radically-different performances through these last massive dollar rallies is readily evident in this chart.  Gold is superimposed over the USDX here, which is segmented into its major swings.  Both the dollar’s and gold’s performances within those are noted.  Somehow during the last 3.6 months when the USDX rocketed 9.4% higher, gold merely edged 0.0% lower!  Gold has absolutely defied this strong dollar.

The USDX and gold have long had a strong negative correlation, with the red and blue lines here mostly inverted mirror images.  This makes sense fundamentally, as they are competing currencies.  Gold has been the most-successful, universal, and longest-lived medium of exchange in all of world history, with the modern fiat dollar a mere half-century upstart!  When a major currency strengthens, others weaken in its terms.

This sure happened that last time the USDX similarly blasted higher in mid-2022.  Then top Fed officials were panicking about raging inflation, so their FOMC hiked the federal-funds rate an epic 350 basis points in just 6.0 months!  Starting from zero rates, that was the most-violent hiking cycle in the Fed’s entire century-plus history.  In just 4.0 months surrounding those wild hikes, the USDX rocketed 12.3% higher.

That catapulted it to an extreme 20.4-year secular high in late September 2022!  Gold wilted under that epic dollar moonshot, collapsing a proportional 12.1% in that same span.  That hammered gold to a parallel deep 2.5-year secular low.  All that proved an unsustainable extreme anomaly that soon quickly unwound, as over the next 4.2 months the USDX plunged 11.4% launching gold an awesome 19.8% higher!

This chart reveals a similar near-vertical trajectory in the USDX in recent months.  Interestingly just this Monday, the USDX achieved a 26.2-month secular high of 109.8.  110+ levels are super-high and quite rare.  Even while the Fed was going ham with aggressive hikes in mid-2022, the US Dollar Index only spent a couple months over 110.  So odds are the dollar’s recent blistering surge is largely-exhausted.

That’s certainly a bullish omen for gold, which almost always strengthens when the USDX weakens.  And just like in late 2022, the dollar is overdue to proportionally roll over hard again.  Because of its colossal rally in recent months, both overboughtness and herd greed are excessive.  That rebalancing selloff will likely at least force the USDX to the lower support of its trading range in recent years, way down near 101!

Ironically the usual inverse gold-dollar technicals aren’t driven by currency fundamentals, but by gold-futures trading.  Each contract controls 100 ounces of gold, worth $269,650 at midweek prices.  Yet the COMEX only requires gold-futures speculators to maintain cash margins in their accounts of $11,500 for each contract traded.  That allows extreme maximum leverage of 23.4x, which heavily distorts gold pricing!

Way up at 23x which is an order of magnitude greater than stock markets’ 2x legal limit, a mere 4.3% gold move against specs’ bets wipes out 100% of their capital risked.  That forces their trading time horizons to be ultra-myopic, hours, days, or maybe weeks.  Running such crazy risks, they can’t afford to be wrong for long.  So they are quick to trade when gold is moving, which then dominates short-term gold price trends.

At 23x, each dollar deployed in gold futures has 23x the price impact on gold as a dollar invested outright!  So though the overall amount of capital deployed in gold futures is small in the grand scheme of markets, specs punch weigh above their weights in bullying gold.  And their favorite trading cue is the US dollar’s fortunes.  So when the USDX either rises or falls fairly-rapidly, gold-futures speculators usually do the opposite.

The dollar in turn is overwhelmingly driven by traders attempting to game the Fed’s monetary policy, particularly the federal-funds-rate trajectory.  Higher rates are bullish for the US dollar, leaving yields of dollar-denominated bonds more competitive with other major currencies.  And vice-versa, lower rates are dollar-bearish.  Nothing moves traders’ FFR outlook like major economic data, which Fed officials closely watch.

That includes heavy hitters like monthly US jobs and CPI inflation.  The former’s latest print was released last Friday, and the latter’s this Wednesday.  Headline nonfarm payrolls in December were a big upside surprise, a four-standard-deviation beat of expectations to +256k jobs.  So the USDX surged 0.6% that day on lower odds of further Fed rate cuts.  Gold took an initial hit, then defiantly reversed to rally 1.1% on close!

The latest CPI read was mixed, but its 0.2% month-over-month increase in the core version excluding food and energy was a tenth cooler than expected.  So the USDX slipped 0.2% while gold rallied another 0.8%.  After this major economic data along with wholesale PPI inflation and retail sales over this past week, futures-implied Fed-rate-hike odds across all of 2025 have collapsed to just one 25-basis-point cut!

That’s much lower than top Fed officials’ own projections from mid-December, which forecast 50bp of cuts this year.  And that was down from 100bp just three months earlier.  So with traders now convinced the next eight FOMC meetings will only see a single 25bp cut, they are about as Fed-hawkish as they can get!  That lopsided herd belief argues a mean reversion the other way is imminent, to expecting more rate cuts again.

Before we get to that, realize the main reason the USDX soared in recent months was political.  The dollar started rallying as Trump’s betting-market odds of winning surged, and then soared once he won.  Overwhelmingly-Democrat, top Fed officials and their staffs have a long history of being more likely to keep rates higher under Republican presidents.  That’s easy to prove historically so traders bet on it.

The Fed guys won’t admit their political biases, so they are claiming they slashed their rate-cut trajectory on Trump’s win due to his likely policies.  Many if not most economists believe high tariffs are inflationary, driving up domestic prices.  That threatens to fuel resurgent headline inflation, which pressures the Fed to slow or stop rate cuts.  Either way, the federal-funds-rate trajectory will be higher under Trump than Harris.

Yet 2025 will still likely see plenty of Fed-dovish downside surprises in major economic data.  Last week I wrote an essay analyzing this in US monthly jobs.  Under the Biden Administration, those have been wildly overstated initially then soon revised much lower.  That will likely change with new management under Trump, making for worse-but-more-realistic jobs growth on balance.  Weaker jobs spark dollar selling.

Provocatively back in late 2022 when the USDX plunged proportionally after that violent-rate-hike-fueled moonshot, the Fed didn’t stop hiking.  During that 4.2 months the dollar collapsed 11.4% after soaring so unsustainably, the FOMC hiked its FFR another monster 75bp, then another 50bp, then another 25bp!  But traders’ perceptions of the future FFR trajectory were moderating, so they fled the dollar goosing gold.

2025’s USDX action is likely to play out similarly after that recent blistering surge.  How many times the Fed cuts this year aren’t as important as how traders see the FFR moving.  Weaker jobs reports along with cooler headline inflation reads would quickly drive down that rate outlook.  That would hammer the really-overbought and greed-drenched US dollar, fueling major opposing gold-futures buying by speculators.

They certainly have plenty of room to flood back into gold, despite its high consolidation near record levels.  In the latest weekly report of speculators’ gold-futures positioning, their total long contracts which overwhelmingly drive short-term gold fortunes remained relatively-low.  Considered in the context of their trading range within gold’s 53% monster upleg last year, they were merely running 46% up into that.

Thus specs have more likely room to buy gold futures than sell.  The last time spec longs were back near recent levels in early July, gold was only trading near $2,325 before surging another 20% higher over the next several months or so on heavy gold-futures buying!  The USDX correcting symmetrically again would almost certainly spawn more, which would easily push gold considerably higher to many more records.

And gold-futures specs certainly aren’t gold’s only potential buyers with lots of capital firepower available to redeploy.  Astoundingly American stock investors have yet to even start chasing gold’s monster upleg.  During those 12.9 months gold soared 53.1% higher, the combined bullion holdings of the world-dominant American GLD and IAU gold ETFS actually slumped 0.4%!  Midweek that has retreated further to -0.9%.

Past 40%+ monster-status gold uplegs have been mostly driven by American stock investors rushing into GLD and IAU forcing huge holdings builds.  Gold’s previous two 40%+ uplegs both crested in 2020, and during them GLD+IAU holdings soared 30.4% and 35.3% or 314.2 and 460.5 metric tons!  If these guys returning to gold forces another similar holdings build around 400t, gold is still heading much higher.

The main reason 2024 proved such a remarkable year for gold is foreign buyers took the helm in driving gold higher while American stock investors were enthralled by the AI stock bubble.  Chinese investors, central banks, and Indian jewelry consumers were major buyers throughout much of last year.  There’s no reason not to expect their strong demand to remain robust in 2025, regardless of the US dollar’s fortunes.

But gold’s most-likely near-term bullish catalyst is gold-futures buying returning on the way-overextended and largely-exhausted USDX rolling over into a major selloff.  That would have to hit 8.0% to drag this key dollar benchmark back down to recent years’ support zone!  And if gold was resilient enough to drift flat during the USDX’s blistering 9.4% surge in recent months, imagine how it will rally when the dollar mean reverts.

While gold will thrive and extend its monster upleg even deeper into record territory, gold’s upside will be dwarfed by the better gold stocks’ gains.  With gold so high, fundamentally-superior smaller gold miners are earning massive record profits.  Our newsletter trading books are currently full of newer trades in the best of these with big production growth coming.  They could easily double or more from here as gold surges!

This is not just sentimental, but fundamentally supported by colossal record earnings and growth.  The GDXJ gold-stock ETF is mostly mid-tiers.  During the last six reported quarters, GDXJ’s top 25 stocks have reported average unit profits of $659, $669, $651, $777, $1,095, and $1,146 per ounce which soared 34%, 106%, 126%, 63%, 66%, and 71% year-over-year!  Q4’24’s are tracking near $1,300 and 100%!

The bottom line is gold has mightily defied the US dollar’s massive surge in recent months, mostly drifting flat in a high consolidation.  And after blasting to really-overbought levels drenched in greed in rarefied unsustainable territory, the dollar’s upside is largely spent.  That portends a symmetrical selloff ahead, driven by an overdue mean-reversion Fed-dovish swing in traders’ federal-funds-rate-trajectory outlook.

As the dollar rolls over hard, speculators will flock back to gold futures driving gold higher.  The resulting new records will rekindle excitement, increasingly attracting American stock investors who have totally sat out gold’s monster upleg so far.  Gold forging higher will attract more traders back to gold stocks, fueling big outsized gains as they catch up with their metal.  Fundamentally-superior smaller gold miners will soar.

Adam Hamilton, CPA

January 17, 2025
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