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Gold Sector Weakness into the Next Fed Meeting

Commentaries & Views

With stocks in rally mode this week, gold is taking a break after having a two month move of over $150 higher which included breaking major long-term resistance (now support) at the $1300 level. This correction is not surprising considering how short-term over-bought the sector had become. Especially when we consider what took place when we last had gold trading well above $1300, back in early November, 2016.

The sector had two major catalysts happen simultaneously on November 8th, last year. The first was Donald Trump shocking the world by winning the US Presidential election, which catapulted gold to $1338 in the Asian market. Moreover, while the world was transfixed by this monumental event, the Indian government made an equally surprising demonetization announcement just minutes after Trump had officially been declared the victor.

From a technical perspective, the huge volume that occurred in the sector on the news of these two events turned the $1350 price zone into powerful resistance. The current decline has been very mild in comparison to the sell-off which ensued after the Indian demonetization announcement, with traders now beginning to focus on the upcoming Federal Open Market Committee (FOMC) meeting next week.

The Fed’s Jackson Hole, Wyoming, summer meeting came and went at the end of August without Fed Chairwoman Janet Yellen mentioning interest rate policy. The Fed raised rates in December 2015, December 2016, March 2017 and June 2017 to get out ahead of what they believed was to be near-term coming inflation. The CPI Report for August, which was released on September 14th, surged 0.4% last month to mark the biggest increase since January, mostly due to much higher gasoline prices in the wake of heavy damage to major refining operations in Houston from Hurricane Harvey during the summer driving season.

Up until this report, the low rate of inflation despite the tightest labor market in years has confounded the Federal Reserve. This has the street pricing in a zero chance of a rate hike next week, so when Janet Yellen presents her statement to the press on September 20th at 2:00pm EST, the focus will be on the chances of a December hike, which is now over 50%, according to CME’s Fed Watch Tool.

Another near-term gold catalyst on the horizon could be the German Federal Election on September 24th. Polls currently show that Angela Merkel's Christian Democratic Union (CDU) party - with its Bavarian sister party, the Christian Social Union (CSU) - will be the largest party after the Bundestag election, but they will fall short of a majority.

However, recent polls have also shown Martin Schulz, the German Social Democrats’ (SPD) candidate, would beat Chancellor Angela Merkel if balloting was based on a direct leadership vote. The SPD are 63.7% in favor of letting the refugees vote, which could eventually set off an internal German civil war if this were to be implemented. Spiegel, the German magazine reported earlier this year: “In 1990, all of Germany celebrated the reunification of a country divided since World War II. But the optimism was naively misplaced. The real German division sees the North pitted against the South.”

Therefore, should the SPD secure more than a quarter of the vote, gold could get a strong boost immediately after the results of the election are known, just as the Trump victory brought in massive bullion buying last November.

The miners have also begun a healthy correction when measured by the GDX. The global miner ETF hit strong resistance at the $25-$26 area last week, while the gold price was trading above the $1350 level. Although volume has picked up since the last week of August, we have yet to see the large volume necessary to get the GDX trading firmly above this long-term resistance area.

After a short-term correction, the US equity markets are back to trading at all-time highs, which has investors taking short-term gains in the gold sector and focusing on equities again. After losing long-term weekly support at 92 on the Cash Settle Index last week, the severely over-sold US Dollar back-tested this area and is selling off again ahead of the FOMC speech next Wednesday. Computer based algorithm trades will be set based on the language in this speech, and the rate hike questions during the press conference afterwards.

Although the short-term fundamentals can still put some downward pressure on gold, there may be a reluctance to sell given concerns over a renewed spike in North Korea fears this week. According to Reuters on September 14th, “A North Korean state agency threatened on Thursday to use nuclear weapons to “sink” Japan and reduce the United States to “ashes and darkness” for supporting a U.N. Security Council resolution and sanctions over its latest nuclear test.”

I am looking for the $1300 level in gold and the $23.50 level in the GDX to be strong weekly support into Q4. Being a junior miner investor, as long as gold maintains a solid floor of $1250, I will continue to remain fully invested in this sector.

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 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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