Gold At Multi-Year Highs Is Very Precarious, Risk For Cascading Sell-Off Of Gold Very High

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from Silver Doctors:

Gold-futures speculators and/or American stock investors have to keep buying.  If they don’t, gold will stall out and…

by Adam Hamilton of Zeal LLC

Gold dramatically surged to major new secular highs this past week, fueled by stunning geopolitical news.  The US assassinated Iran’s top general, so Iran fired ballistic missiles at military bases in Iraq used by the US.  That naturally ramped gold bullishness, spawning all kinds of predictions for much-higher prices.  But geopolitically-driven gold spikes never last long, and the gold buying behind this surge is very precarious.

Geopolitics are fascinating, the modern intersection of centuries of history, politics, religion, and military actions.  Growing up, geopolitics were my second passion after the markets.  I read everything I could on that broad topic, both nonfiction and fiction.  Tom Clancy’s masterful novels were my favorites, and I love that whole technothriller genre to this day.  For decades I’ve eagerly followed and devoured geopolitical news.

And being a lifelong stock speculator, I’ve always had a special interest in how geopolitical developments affect markets.  So this past week’s wildly-unexpected events were amazing to observe, and had major impacts on gold prices.  Last Thursday January 2nd, gold closed at $1528.  That was its best level since late September, but unremarkable with gold well under its last upleg’s peak of $1554 in early September.

Then overnight a US Reaper drone fired missiles at cars carrying Iran’s top general Qasem Soleimani at Baghdad International Airport in Iraq!  He commanded all of Iran’s extraterritorial military and clandestine operations, which were often carried out by proxy foreign militias that Iran armed and supported.  This targeted assassination was authorized by Trump because Soleimani was reportedly plotting to kill Americans.

Gold shot as high as $1550 on that shocking game-changing event, which risked snowballing into a full-blown war between the US and Iran.  Last Friday the 3rd it closed up 1.4% to $1549, the highest it had been since that last upleg peak.  Iran would have to retaliate over the killing of who was described as its second-highest official after its president.  Over the weekend speculation of what that would look like ran rampant.

When US gold-futures trading opened up Sunday evening New York time, gold rocketed from $1552 to $1585 virtually instantly.  It was able to hold some of those gains this Monday, rallying 1.0% to $1565.  That was not only a new upleg high, but a major secular one as gold’s highest close in 6.7 years!  Gold excitement was really building, leading to countless forecasts that a major surge higher was just starting.

Gold climbed another 0.4% to $1572 on Tuesday, with mounting anticipation for Iran’s revenge.  I warned about gold being very overextended in our weekly newsletter that day, writing “Geopolitical rallies are seldom sustainable anyway.  The initial fears from events always prove worse than realities.  And once the geopolitical news fades from prominence in a matter of days, that gold-futures buying reverses to selling.”

At Tuesday’s US close I concluded that, “Given the extreme spec gold-futures positioning and a lack of investment-buying support, gold’s near-term outlook is for a sharp selloff.”  That contrarian view sure wasn’t popular, like usual when greed is swelling with gold at major highs.  Before I share the analyses that fed into that call, geopolitically-motivated gold rallies are always suspect since they never last for long.

After big geopolitical news flares, the airwaves are flooded with military experts commenting on what is going on.  Without fail, they spin dire worst-case scenarios of what could happen next.  While these are often plausible, history has proven they almost never play out.  I first learned this lesson in high school as I tried to trade around the Gulf War from mid-1990 to early 1991, when the US invaded Iraq to liberate Kuwait.

Iraq invaded and annexed Kuwait in August 1990.  Iraq’s military, considered the best in the region by far then, dug in and heavily fortified positions for months.  As the US started shipping in an invasion force, pundits warned attacking Iraq’s army would take months resulting in thousands of American soldiers dying.  But instead of fighting to the death, Iraqi soldiers mostly fled.  The ground battle was largely over within days!

The retreating Iraqi military had a scorched-earth policy, setting fire to around 700 oil wells.  Experts filled the media warning it would take years to extinguish those raging fires, and the entire planet faced cooling and crop failures as oil-fire smoke reflected too much sunlight.  Yet most of those were extinguished in a few months, and all were put out within that same year!  Geopolitical worst-case scenarios are always wrong.

More recently last September, a drone and cruise-missile attack took down one of the world’s largest oil-processing facilities in Saudi Arabia.  Abqaiq removes hydrogen sulfide from 7m bpd of Saudi crude oil, making it safe to be shipped in tankers.  About 5% of global oil capacity was taken offline, and experts warned repairs would take months!  Yet that massive facility was back up to full capacity in a couple weeks.

In my decades studying the markets and trading, I can’t recall a single major geopolitical event that proved worse than initial assessments.  Gloom and doom drives viewers and thus advertising revenue, so the media looks for worst-case-type experts.  When the aftermath of geopolitical events doesn’t prove as bad as first feared, the gold and oil spikes quickly reverse into proportional selling.  This is all sentiment-driven.

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