The Gold Sector Continues to Confuse Participants
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Earlier this week, the gold sector appeared to be heading for a breakout after the miners had been lagging the gold price for the past three weeks. On Tuesday, June 6th, the miner sector finally decided to join the bullion party and had a very nice upside move while gold raced toward the $1300 level.
This move caught many by surprise as the highly publicized Van Eck Junior Miners Gold Index GDXJ rebalance has kept many would be participants on the sidelines. The announcement, which was made by the fund back in mid-April, was a call to arms for hedge fund shorts to sell down many of the small cap precious metal companies that make up much of the index.
The strong volume move in the GDX on June 6th above $23.50 resistance breathed new life into the sector. The equally strong daily close in gold above the $1280 level earlier this week had the bulls calling this price action a possible breakout from the downtrend line formed after the 2011 top at $1920.
After gold had become short term overbought, we saw some profit taking in the next few trading sessions with investors preparing for the outcome of the UK snap election vote on “Super Thursday”.
At around this time last year, we had a surprise outcome of the “Brexit” vote which moved the gold sector higher on safe haven buying. However, the surprise results of the just announced UK snap election have lead to a “hung parliament”, casting some doubt on Great Britain leaving the European Union. Ironically, a few days before the UK election results were known, gold made a reversal this week near the same level it was trading when the “Brexit” vote was announced on June 24th last year.
This unexpected outcome is in the process of possibly forming a nasty bearish reversal on the weekly gold chart as I type this missive. The spot bullion price of $1260 needs to hold this week or there is a strong chance of heavy selling as we head into the Federal Reserve FOMC meeting next week. The US Dollar has also become oversold and may be in the process of bouncing into the meeting results next Wednesday, putting further pressure on the gold sector.
The Federal Reserve FOMC policy meeting speech on June 14th at 11:00am EST is the next possible catalyst for the gold sector. A fourth Fed rate hike has now been priced in by the market, however, the future outlook by the committee will be what the algorithm based trading will be focusing on.
As we head into the FOMC meeting next week, the yellow metal needs to maintain the $1260 level to negate further selling and the GDX has to hold the $22 area, or we could easily see more pain heading into July. On the upside, this new miner bull market will begin the next leg higher once we see a strong weekly close above the $1310 level in gold accompanied with the $25 level in the GDX.