Gold Stops Being Hunted into FOMC Meeting Next Week
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As I type this missive, gold has lost strong support at the $1260 level and is being sold briskly into the release of the US Non-Farms Payroll (NFP) report for November, which will be issued to the market by the time this article is posted. This sell-off should not be a surprise, based on the terrible performance of the miners in relation to the gold price during the past few months. The breach of $1260 in spot gold has created a “stop hunt”, with the $1200-$1210 level now being critical support.
Last week, I mentioned the probability of more selling in the miners as we head into the last Federal Reserve Open Market Committee (FOMC) meeting speech by out-going Chairperson Janet Yellen on December 13th. The more over-sold miners become on this move down, the better chance we have at a significant bottom happening in the December/January time-frame for the third year running. The Fed raised interest rates before each significant December low in the miners the last two years and the market is already pricing in another rate hike next week.
In fact, the December 2015 Fed interest rate hike marked the end of a nearly five-year-long bear market. For the last two years, the gold price took a steep dive before the last FOMC meeting of the year, just as it is doing again leading up to the December meeting next week. Both of the previous December rate hikes created a “buy the news” bottom in the GDX, so there could be big money players on the sidelines waiting for signs of a similar outcome this year either before, or just after the expected rate increase.
Gold has also been pressured by the US Dollar rising to its highest level in two weeks on optimism towards U.S. lawmakers' making progress on tax legislation. The Republican-led Senate voted on Wednesday to go into a conference committee with the House to negotiate a plan to reform the tax system, amid early signs that lawmakers could bridge their differences and agree on a final bill ahead of a self-imposed December 22nd deadline. If this indeed takes place, the “risk-off” trade could continue to put more pressure on bullion as we head into year-end.
Another sector which could be garnering some of the miners’ speculative capital is the raging cryptocurrency market. There are a few gold sector pundits who have blamed the bitcoin mania, in part, for the miners’ dreary performance this year. They feel speculative capital which would normally be allocated to miners, has been placed into bitcoin instead.
This week, Canadian mine developer Goldcliff Resource Corp. announced the company will be developing a gold-based cryptocurrency plan, which will utilize the firm’s existing assets. The share price of the micro-cap junior rocketed over 125% on the news. I would not be surprised to see a gold bottom coincide with a significant top in the full-blown speculative mania that bitcoin has obviously become.
Bitcoin is now trading on par with the trajectory of the seventeenth century Tulip Bulb mania as it screams higher towards $20,000, despite worries about a dangerous bubble and questions about the cryptocurrency's real value. Prices have been rising parabolically since CBOE Global markets said it will launch futures trading in the cryptocurrency from Dec. 10 after receiving a green light from the Commodity Futures Trading Commission. The CME Group will begin initial listings of bitcoin futures contracts on Dec. 18.
Meanwhile, I am beginning to see signs of a major bottom taking place in the miners very soon. Many of the juniors I follow and/or own in the sector are showing signs of selling fatigue, as tax-loss selling in some selective shares has possibly ceased. Many of the Canadian arctic seasonal juniors, whose share prices began to sell-off before the rest of the sector, are showing signs of bottoming early with volume drying up in many of them.
As the selling in the GDX nears critical support at the $21 level, volume has been decreasing since the impulse move down in the major miner ETF began in late November, which could be another sign of selling fatigue in the sector. Also, the selling began to decrease in GDX after gold broke strongly below major support at $1260 on Thursday.
If past is prologue, gold will steady and begin rallying at some point over the next few weeks as the miners begin forming a significant bottom. However, if the $21 level is broken on the GDX, keep in mind that a trap door could open for a final flush down to the $17 to $18 area before the next up-leg begins.