FOMC Minutes Reverses Gold Bounce
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Featuring views and opinions written by market professionals, not staff journalists.
Just before the minutes to the previously concluded Federal Reserve Open Market Committee (FOMC) meeting on August 1st were released this Wednesday, gold was in the process of back-testing the $1200 region in the December contract. The precious metal had made a nice $40 reversal from last Thursday’s over-night spike low at $1167 but was stopped cold at it’s 18-day moving average yet again. This falling line of resistance, currently at $1210, has been keeping a lid on the price each time it has been back-tested multiple times since the gold sell-off began to pick up more steam in early June.
The main reason gold was benefiting from the U.S. dollar reversing its continuous rise was earlier this week when President Trump openly criticized Fed policy for the second time. Trump has been attempting to politicize the Fed since mid-July, as the U.S. central bank’s rate hike policy is detrimental to his economic policy (Please see my column from two weeks ago, here.)
Since the U.S. President’s remarks on Monday, the worlds reserve currency began to slide toward testing its breakout level at 95 on the Cash Settle Index. However, the greenback began to bounce from its rising 50-day moving average, which also coincides with the breakout level at 95, after the FOMC minutes were released at 2:00pm EST on Wednesday.
The minutes revealed U.S. central bankers standing ready to raise interest rates again so long as the economy remains healthy. Although the Fed discussed raising interest rates soon to counter excessive economic strength, they also examined how global trade disputes could batter businesses and households. The latter could be construed as a possible slowdown in future rate hikes. However, the market chose to focus on the probability of two more rate hikes this year, so the dollar began to rise which put an end to gold’s countertrend bounce.
Meanwhile, the latest Commitment of Traders report (CoT) showed the managed money short position (speculators) grew for the ninth consecutive week to yet another all-time record. The larger this position grows without selling down, the odds increase for a “sling-shot” ending to this decline once a bullish catalyst appears.
A possible catalyst to reverse the gold tide may appear later today based on what Federal Reserve Chairman Jerome Powell has to say in his speech from the annual global central bank conference in Jackson Hole, Wyoming. He will speak on monetary policy in a changing economy at the start of the two-day conference, according to a notice from the Fed last week. Fed chairs in the past have used speeches at the Kansas Fed-sponsored conference to signal future U.S. central bank policy moves.
If the speech mentions the Fed focusing more on the growing trade disputes being harmful to the economy, any hint of the planned rate-hike possibly being put on hold at the December meeting could spark some short covering in the aforementioned record managed money short position. Nevertheless, it is my feeling that a more hawkish speech, which focuses on the continuation of the dot-plot already in place, could escalate the dollar rally and continue to pressure the precious metal complex into the weekend.
If the latter scenario begins to take place later this afternoon, the waterfall decline in the complex may not be over. As mentioned in last week’s missive, since the gold price has lost $1200 on a weekly closing basis, the $1140 region may be seen quickly. The levels to watch for a possible long-term bottom in gold is the December 2016 low at $1125. For the GDX, which has already made a close below its December 2016 low, a major bottom may not be in place until we see a $16 handle in the global miner ETF.
Caution is still advised and a large cash position is recommended to take advantage of some very good entry points, which are beginning to appear in quality juniors with proven management teams. If you need assistance in choosing the best precious metal juniors to invest during this capitulation sell-off in the complex, stop by my website at www.juniorminerjunky.com and check out the subscription service.