Big Move Coming In Gold As US Equity Speculators Are Drunk On Margin

This week will begin with a Zelensky/Europe/Trump meeting at the White House, and it will conclude with Chairman Powell's final Jackson Hole Speech.

As we await Monday’s Washington D.C. meeting between Zelensky, European leaders and Trump 2.0, I think it’s a useful time to discuss the setups in gold and equities heading into what suddenly appears to be a week packed with potential news catalysts.

This week will begin with a Zelensky/Europe/Trump meeting at the White House, and it will conclude with Chairman Powell's final Jackson Hole Speech. In between Monday’s peace talks in Washington and Friday’s Jackson Hole speech by Chairman Powell, we will be treated to a bevy of Fed speakers throughout the week. In addition, the minutes to the July FOMC meeting will be published on Wednesday afternoon - these minutes are more important due to the fact that the July FOMC decision had the first two dissents since 1993.

Gold (Weekly)

The current chart setup in gold is fascinating and worth discussing in some detail.

Since gold decisively broke out above $2,100/oz in the spring of 2024, it has experienced three corrective phases. We are now in the midst of the third. You could call this a 17-month bull market (March 2024 through August 2025), but roughly half of that period has been spent with gold largely trading sideways.

The current correction began in mid-April when gold briefly spiked to around $3,500/oz. However, the “correction” has unfolded almost entirely through time rather than price. It is worth noting that the strongest bull markets often behave this way—powerful markup phases interspersed with lengthy consolidations.

Given the extended duration of the current corrective phase (now entering its fifth month), the tightening triangle pattern visible on the chart, and the number of potential catalysts lined up over the coming weeks, I expect we will soon see a resolution—either a breakout above $3,440 or a breakdown below $3,200.

Gold (Daily)

A great deal of potential energy has built up within this multi-month range, with sellers consistently turning more aggressive at or above the $3,440 level (tested four times since April) and buyers repeatedly stepping in on dips below $3,300.

As is so often the case, I expect we will first see a “convincing” false move before the “real move” that resolves this consolidation once and for all.

While I remain skeptical that a lasting peace deal between Russia and Ukraine will be announced this week, market participants must nonetheless be prepared for the possibility. A deal that includes the removal of sanctions on Russia would exert further downward pressure on oil and natural gas markets.

In the near term, precious metals would also likely face knee-jerk selling. The irony, however, is that lower energy prices should help ease renewed inflation concerns, opening the door to more aggressive Fed rate cuts. In theory, that prospect should ultimately favor precious metals.

For my part, I will be less focused on how markets react in the immediate aftermath of any peace deal and far more interested to see how they settle at the end of the week.

China continues to be a relentless buyer of gold, both officially and secretly. China’s central bank (PBoC) added to its gold stockpiles for the ninth consecutive month, increasing its official gold reserves to 73.96 million fine troy ounces at the end of July from 73.90 million ounces at the end of June.

But what’s much more interesting is that China’s secret gold buying dwarfs its official purchases:

In April, the PBoC and regulators explicitly urged expansion of the yuan benchmark’s application in global mainstream markets and support for SGE cooperation with overseas exchanges—tying RMB internationalization directly to gold pricing. Days later, China said it would allow international vaults to settle against SGE contracts and considered overseas warehouses, making RMB-priced gold more usable globally.

These are direct efforts to chip away at US dollar supremacy with gold playing an integral role in increased RMB acceptance in trade settlement globally.

Gold gives China (1) a yuan-priced commodity benchmark with global relevance; (2) cross-border RMB rails (SGEI/CNH/CME linkage, and now e-CNY) anchored in a high-trust reserve asset; and (3) policy-backed infrastructure (overseas vaults/warehouses) to make RMB-denominated gold practical for settlement, collateral, and investment outside the mainland.

I expect to hear more about RMB-priced gold in the near future. Additionally, a US/China agreed upon gold revaluation is still a very strong possibility.

Color me a buyer of gold on a decent-sized Ukraine/Russia peace deal dip.

Finally, I would like to point out what I view to be an increasingly fragile US equity market backdrop. A few factors worth noting about the current US equity market condition at SPX 6450:

• Speculative leverage is at extremes, including margin debt above US$1 trillion and increasing at a record pace.

• Equity put/call ratio closed at .48 on Friday (below .50 signals extreme complacency)

• Cash allocations are at multi-year lows, and falling

• US labor market clearly deteriorating but Wall Street doesn’t seem to care one bit

• The VIX sends a message of “don’t worry be happy”

Complacency is high, speculative risk-taking either via excessive leverage or Las Vegas style options trading madness has never been greater, and stocks have never been more overvalued:

What could go wrong?

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