Gold Closes Below $1250 Bringing New Bull into QuestionFriday December 02, 2016 15:12
Just a mid-week heads up on the miners here as I believe gold breaking below $1250 last Friday is a huge red flag. Something bearish happened on the way towards the GDX testing strong support at 21-20. As my post last Friday was being read, the gold price closed below $1250 on the week. I believe in order to maintain a bullish bias, this level needed to be held as GDX hit my 21-20 target.
After Donald Trump became the new US President Elect last Tuesday evening, the market immediately began to focus on the Fed Funds Rate. In just four trading days and on record volume, the gold price had a huge $125 reversal from the Tuesday over night pop at $1337 to strong support at $1210. The futures market has now priced in a 92% chance of a rate hike on December 14th.
So far, the miner bounce off this level has been very week as the gold price is trading sideways into Fed Chair Janet Yellen’s testimony before Joint Economic Committee of US Congress on Thursday at 10:00am EST. The new President Elect has been very vocal about the Fed creating a “false economy”. As he stated back in September, “They’re keeping rates down because they don’t want everything else to go down”. Mrs. Yellen could very well strike a hawkish tone before the committee and pressure the gold price further into year end.
Mr. Trump’s planned tax cuts and huge infrastructure spending plans are highly inflationary. Gold has historically not been a predictor of inflation as it has moved higher in the past as a reactor. Therefore, the market has now shifted focus on to interest rates going higher and does not wish to hold gold for the short term as it provides no yield.
Combine this with tax loss selling in miners as investors pile into general equities and you have a recipe for the miners breaking down further with the gold price into the new year.
We may have to endure one final low in gold if the $1200 level gives way into the year end. A double bottom at $1050, or even a short term panic break of the $1000 level must not be ruled out if the $1200 level gives way. The miners typically lead the metal so I believe the 20 GDX level must hold. Gold also needs to get back above $1250 on a weekly basis close in order to nullify this scenario.
The next support level to watch would be the 16 level on the GDX. When the market changes, we must psychologically and financially prepare for worst case scenarios as risk management comes into play when key sector levels are broken.
David Erfle is a 52 year old self-taught mining sector investor. He stumbled upon the mining sector in 2003 as he was looking to invest into a growing sector of the market. After researching the gains made from the 2001 bottom in the tiny gold and silver sector he became fascinated with this niche market. So much so that in 2005 he decided to sell his home and invest the entire proceeds from the sale into junior mining companies. When his account had tripled by September, 2007, he decided to quit his job as the Telecommunications Equipment Buyer at UCLA and make investing in this sector his full time job. He personally survived two bear markets, witnessed incredible sector changes and had to alter his investment philosophy numerous times in order to adapt to changing market conditions."