(Kitco News) – Gold has had a phenomenal run in 2024, establishing new record highs on multiple occasions, leading some to say that a correction is in store because positioning is too high. But according to one analyst, this quiet gold rally is just getting warmed up.
“Various macro experts doubt the gold trend because ‘positioning is too high,’” wrote Charlie Morris, founder of ByteTree. “I just don’t see it… While investors have largely missed this gargantuan gold rally, the central banks have bagged it.”
Morris pointed to the technical outlook for gold, which he said was at a “resounding all-time high.”
“So many gold doubters but there’s no doubt in the trend,” he said. “I show the gold price since the late 1970s and how it took 27 years to reach a new high in 2006/7. Then the price surged to $1,911, before consolidating for nearly nine years, to the pandemic high in mid-2020. Gold then fought off after the rate hikes, against the odds, and is making progress. It’s a booming, yet contrarian trade, because it is so quiet.”
He noted that a “new era” began in 2006 that saw gold lag the S&P 500, “but not by much (dividends excluded).”
“It is remarkable how these two assets work against each other, distinctly demonstrating the natural power of gold as a portfolio diversifier,” he said. “It’s clear to the naked eye.”
“Yet I have read various macro experts doubt the gold trend because ‘positioning is too high’. I just don’t see it,” he reiterated.
To reinforce his position, he noted that gold ETFs “only hold as many ounces of gold as they did in 2013, before the crash.”
“They are rising again, which is great, but there is a long way to go before you might deem gold to be a crowded trade,” he said. “Then there are the longs in futures (COT longs), which are high, but not that high, while the COT shorts are behaving randomly, as they often seem to do. Besides, they are a small sample of just 8 million ounces (moz) compared to 34 moz for the longs and 82 moz for the ETFs.”
“I believe many investors give too much weight to the COT data despite it being far less significant than the ETF flows,” Morris said. “They see the longs at high levels reflect excessively bullish sentiment, which it can do, but doesn’t have to. It could just be a genuinely bullish situation with a good chart. More importantly, the COT simply reflects the strength of the trend and even lags at that.”
“Futures contracts naturally cancel each other out, and so the longs are a measure of the actively managed funds, most of which are trend followers (jargon alert - managed futures, CTA, macro hedge funds),” he noted. “They buy more gold futures when the trend is strong and sell when it is weak. Hence the long futures correlate with trend strength.”
Morris showed that longs tend to lag behind strong uptrends to illustrate this point.
“Zooming in on the 2014/6 era, the longs lagged ByteTrend on all occasions,” he said. “Notice the surge in 2015 and how ByteTrend scored a 5 signal way ahead of the funds’ positioning. It was the same on the way down too.”
Just as in 2014-2016, this trend is repeating now. “Low positioning reflects a weak trend as seen in 2022. As the trend improves in 2023/4, the funds increase their exposure to gold,” Morris said.
“The COT poisoning data is basically useless, as the price chart tells you the same thing, but as it happens,” he said. “In addition, the shorts are too small to make a difference to the gold market.”
To show the overall financial exposure to gold, Morris combined the ETFs with the longs and subtracted the shorts.
“The market owns 109 moz, which has historically been tightly correlated with the price,” he said. “Yet in the last couple of years, there has been a divergence.”
The bottom half of the chart above highlights the difference between the two measures, displayed as the red line.
“Gold has surged despite weak investor flows since 2021. In hunting around for an explanation, the only credible explanation comes from the central bank gold flows. While investors have largely missed this gargantuan gold rally, the central banks have bagged it,” he said. “I have been focusing on this in recent months and years, and currently, central bank demand remains the single most important driver of the gold price.”
Electric vehicle developments point to increased silver demand
On the topic of silver, Morris cited an X post written by Kevin Bambrough that discussed Samsung’s new solid-state battery, which enables a car to drive 600 miles on a single charge.
“The batteries have a 20-year life, and charge in nine minutes. Best of all, they require silver and plenty of it,” he said. “This reminds me of the silver rally of 2010, which saw the price surge to $50 on the back of demand for solar panels. The slump that followed was weighed down not only by a weak gold market but also by substitution, something that has killed many commodity rallies.”
“Yet the EV bull story is here and now, and if solid-state EV batteries can invigorate the crowd, silver is onto a winner,” Morris said. “The silver price basically matches gold, but goes further not just in bull markets, but whenever there’s a good story. I like this one, and thanks Kevin for bringing it to my attention.”
Bear market for the dollar is positive for precious metals
Discussing last week’s flash crash for the yen, which halted and reversed almost as fast as it fell, Morris said “[O]ne key reason that the crash came to a halt is the weak dollar.”
“To get a 2008 or 2020-type crash, we have typically seen the dollar surge,” he noted. “This time we didn’t, and the dollar is flagging a downtrend.
“Dollar downtrends are generally good for gold, commodities and the world ex-USA,” he said. “My career got going in the 2001 to 2008 era, which saw the dollar fall by a third, and the S&P 500 slump, while everything else seemed to go up. I’ve been like a parrot on this, but it strikes me that we are overdue a repeat era.”
“A dollar bear would certainly help, as would a more buoyant Chinese economy,” he added. “It’ll come and unlock huge amounts of value around the world. Be patient.”
Morris said that the weakness in the dollar is directly related to high debt and deficits in the U.S., but noted that it’s a similar story for many countries. “But they are the biggest, and the dollar is super expensive on a purchasing power basis. A sustained dollar bear is going to happen, but when?”
“The USA can keep the deficits going for many years to come, but something must give,” he said. “The choice is the economy or the dollar? Presidents generally choose the latter.”
Returning to the comparison between the S&P 500 and gold, and charting them against the dollar index, Morris said “Gold should beat the S&P as the dollar slide continues. It’s a repeatable habit.”
“It is remarkable that macro managers are bearish gold because they think it’s a crowded trade,” he concluded. “Far from it, gold positioning is still in 2013, when debt and money have surged since. Gold is on solid ground, and it is spooky how this rally is so quiet.”
