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Gold Sector Déjà Vu

Commentaries & Views

At the tail end of Mr. Gold’s Wild Ride last year, the miners made a very strong reversal while most traders were on Christmas vacation. As gold was bouncing off the post election over-sold low, the GDX began what eventually became a stunning eight-week continuous move higher into the first week of February this year. It was a record weekly run in either direction for the 10 year old major miner ETF.

The 37% move off of the late December bottom is now correcting even in the face of stronger gold this week since they have most likely ran a little too far, too fast. When Donald Trump won the election on Nov. 8 2016, the miners sold off hard from where we are now in the $25-$26 area on the GDX. However, the gold price was $50 higher than it is trading today, so the miners may need to consolidate for another week or so before breaking higher from strong resistance at $25-$26 area on the GDX.

After this consolidation has run its course, the miners should continue higher along with the gold price as there are a few upcoming catalysts which could very well be US Dollar bearish and therefore, gold bullish.

On February 28th, President Trump and his “strong dollar is killing us” rhetoric could very well take center stage at his address at a joint session with congress. The Trump administration knows full well that a strong dollar will inhibit growth, hence the heating up of the currency war by his administration last month.

However, in the long run, I believe the dollar will rise to new highs as the EU situation will most likely get much worse in the not too distant future. Later this year, national elections are taking place in France, Germany, and The Netherlands. These are three EU countries where outsiders are gaining ground on “centrist” candidates. Populist candidate Marine Le Pen is rapidly gaining in the French Election polls and has promised to have a referendum to exit the EU if elected president on April 23rd. The loss of faith in the EU government will bring in more physical bullion buyers, which should increase both the gold price and the US dollar together.

The Federal Reserve Open Market Committee (FOMC) meeting will be held on March 14-15 with a press conference to follow. The Fed minutes from the first meeting of the year came out on February 22nd, showing a dovish leaning collective as they have taken a “wait and see” approach to raising rates further based on the outcome of the Trump administration’s economic plans.

During this meeting, they also seemed none too worried about the rising inflation that was in the process of turning real rates negative once again earlier this month. US inflation rates have now reached 2.50%. The last time they were this high was back in 2012 when Barak Obama was in office while gold was $1800.00 per ounce and the GDX was above $50!

Negative real rates are a key driver for the gold price as investors seek a safe haven from negative yield on their investment capitol. The US Dollar also appears to be moving lower, making what I believe to be a daily “double top” at the 50 day moving average on the cash settle index. This took place on the heels of the Fed’s strategic rate rise back-peddle tone earlier this week.

I also believe the miners could soon begin to sense a bit of sector déjà vu now as they may start to price in a familiar tone which came out of the Fed after the December 2015 rate hike. When the Fed hiked rates in the December 2016 meeting, they set up the market to expect at least three more hikes this year, just as they did at the December 2015 meeting. We all know what happened with the gold sector early last year when the rate hikes kept being postponed.

Okay, I will tell you anyway as I love to say it. The GDX had a staggering 179% move in six months soon after the hike as the Fed continued to back-peddle on further previously promised rate increases. A weekly close above the strong resistance level at $26 in the GDX could easily be achieved very soon if gold makes a solid $1250 floor in anticipation of another non-rate hike by the Fed leading up to their next meeting on March 14-15.

Sector sentiment also remains cautious while the gold futures Commitment of Traders (CoT) report shows the commercial short positions still being very small. These “money mangers” usually have extreme short positions preceding major gold tops.

The last, but certainly not least, reason for my belief in gold continuing to rise here is the fact of rising SPDR gold trust (GLD) investor physical buying. This has proven to be a very strong leading sector indicator and is followed by most of the large fund managers.

While I am writing this update, gold has already passed strong resistance at $1250. However, the miners continue to digest the 37% move off what I believe to be a major bottom reached last December. The miners may be telling us they need more time to consolidate here while they remain weak in the face of gold getting above very strong $1250 resistance. As I have mentioned in previous updates this year, a weekly close in the GDX above $26 would give me another strong indication of a multi-year major bottom being in place for the precious metal miners.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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