Gold and its miners’ stocks are rocketing higher as speculators and investors alike return to this left-for-dead sector.  This sudden deluge of capital inflows has crowned gold stocks the best-performing sector of this young new year by far, shocking traders.  And this stunning reversal of fortunes in both the metal and the companies producing it, is only starting, so it’s exceedingly important to understand what’s going on.

Gold was inarguably the world’s most-hated investment in recent years.  No one wanted anything to do with it, because no one felt any need for it.  The world’s stock markets were relentlessly levitating, thanks to record easing by the world’s elite central banks.  And with stocks seemingly destined to do nothing but rally indefinitely, there was little demand for counter-moving gold for prudent portfolio diversification.

But as global stock markets started sliding in 2016, the bubble in central-bank confidence rapidly started to burst.  Central banks indeed quickly stepped in to try and stave off the waves of selling, but to no avail.  Extreme central-bank jawboning and actions that would’ve dramatically goosed stocks in years past failed to have much impact, helping shake traders awake from their years-long central-bank-induced stupor.

These newly-alert traders started remembering that markets are forever cyclical, they can’t move in a straight line forever.  What’s high and in favor after rallying for years will inevitably roll over and head the other way, a bearish portent for central-bank-levitated stocks.  Conversely what’s low and out of favor after years of selling will inevitably mean revert higher.  Thus investment demand for gold is rekindling.

The dazzling 2016 gold story truly is that simple.  Stock markets are rolling over into a long-overdue new cyclical bear that central banks artificially held at bay for years.  So investors are diversifying into gold, which generally moves counter to stocks.  And with investors migrating back, speculators are flocking in as well to ride gold’s momentum.  With this strategic context in place, let’s dig into what’s been moving gold.

The recent seeds for 2016’s new gold upleg were sown late last July.  Years of central-bank-levitated stock markets had left gold with major secular support between $1150 and $1200.  As gold slumped to the lower end of that zone in its usual summer doldrums, a large bearish speculator decided to press his bets in spectacular fashion late one lazy Sunday evening in July in a record gold-futures shorting attack.

Within one minute around 9:30pm, nearly 24k gold-futures contracts controlling about $2.7b worth of gold were sold short!  This brazen attempt to shatter gold’s support worked, blasting it almost $50 lower in that single minute.  With $1150 broken, gold would drift down near $1084 by early August.  But with bearish futures speculators’ selling exhausted, gold rebounded sharply in what would become a multi-month uptrend.

The American futures speculators who dominantly manhandled gold in 2015 had been overwhelmingly bearish on the yellow metal.  Their core thesis was very simple.  Since gold yields nothing, the coming Fed rate hikes would decimate investment demand for this metal.  Higher yields in bonds would make zero-yielding gold even less attractive, and the resulting capital flight would smash gold way under $1000.

The Fed’s Federal Open Market Committee meeting in late October played right into this bearish-gold outlook.  The very morning of that decision, gold was trading near $1182 and had more than recovered its record-shorting-attack losses.  But the FOMC surprised that day coming across as very hawkish, by declaring it might very well hike rates for the first time in a decade at its next meeting coming in mid-December.

So American futures speculators dumped gold with a vengeance, at rates so extreme several major new all-time records for gold-futures selling were hit.  That frenzied gold-futures selling petered out by early December, with gold pounded back down near $1053.  There were almost no gold bulls left, with even those who called themselves bulls universally predicting another drop down into the $800s before gold bottomed.

But for a handful of contrarian students of the markets including me, this was supremely irrational.  Gold too is forever cyclical, its price can’t fall forever.  And with literally everyone hyper-bearish on this metal and utterly convinced it was doomed to keep spiraling lower indefinitely, peak fear had to be near.  When a trade gets that epically one-sided, everyone susceptible to being scared into selling low has already sold.

And the seemingly-logical core case for this extreme gold bearishness, that a new Fed-rate-hike cycle would devastate zero-yielding gold, was totally false historically!  I started researching gold’s behavior during past Fed-rate-hike cycles last summer.  If higher rates indeed suck capital out of gold, that would be crystal-clear in the historical record.  Surely the gold-futures speculators had done their homework, right?