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FOMC Rate Hike Buy the News Bounce in Gold...Again!

Commentaries & Views

Since December 2015, each time the Federal Reserve Open Market Committee (FOMC) begins to telegraph an interest rate hike the gold sector sells off into the announcement of that hike. And each time the Fed raises, the news is greeted with a short-cover bounce in the precious metal miner sector. This week was no different as the severely over-sold GDX began to move up from critical support in the $21 region when the market opened four and a half hours before the rate increase announcement on Wednesday.

After being down for 9 of the last 11 sessions, the major miner ETF surged over 3% on Fed day with the largest volume since late August, when the GDX was in the final throes of its move toward an early September top. Since gold topped at $1363 in early September, tax-loss selling, combined with “risk-on” capital flooding into a parabolic bitcoin frenzy and a surging US equity market, has taken its toll on the miner sector.

After the Fed announced the expected quarter point rate increase, they projected three more hikes in both 2018 and 2019, unchanged from the last round of forecasts in September. The expected outcome hit the U.S. dollar as it plunged 0.6% against a trade-weighted basket of currencies after the decision, erasing a large chunk of its near 2% rise in the last three weeks. The dollar, which had formed a very bullish three-month head and shoulders bottom into November on the Cash-Settle Index, reversed early last month and now appears to be forming a bearish three-month head and shoulders top as we head into year-end.

Since the greenback has unwound its over-sold condition, the critical support at 91 on the index appears vulnerable again after wrangling in the U.S. Congress over a bill to change the tax code dented confidence that the reforms would be pushed through in their current state.

Earlier today from Reuters: "The overall process of overhauling the tax bill is not in peril. That said, even if the tax bill is passed and becomes law, the positive impact on the dollar could be limited as the market has already priced in such a scenario for the most part," said Shin Kadota, senior strategist at Barclays in Tokyo.

This significant turn of events in the world’s reserve currency has caught many gold sector analysts by surprise. Based mostly on the recent U.S. dollar technical situation and a very bearish Commitment of Traders (CoT) report in gold, most precious metal sector forecasters were expecting the selling to continue toward critical support in the $1200 - $1210 area by year-end. But with too many people expecting this outcome, the yellow metal has instead bounced off near-term support at $1238, which is the 78% retracement from gold’s highest price point this year of $1363. The much stronger bounce in the GDX, in relation to the smaller bounce in the metal this week, has me leaning toward this being a significant bottom as we head into 2018.

Another hint of the sector possibly bottoming this week was the trading information contained in last Friday’s release of the CoT report for the week ending the previous Tuesday. The commercial short positions in both gold and especially the silver CoT showed a massive unwinding of short positions, which did not include the statistics for the period after gold lost strong support at the $1260 level later in the week. Since major bottoms usually take place after speculators have capitulated their long positions into the waiting arms of the bullion banks (commercials), I expect to see an even more bullish gold CoT when it is released a half hour before the market closes today.

I believe the GDX has at the very least made an intermediate-term bottom with most big money traders leaving their desks today and not returning until after Jan. 1. There are a few very convincing reasons for this view:

  1. The strong upside volume with over 82 million shares traded in the GDX on the Wednesday Fed day.
  2. The silver miners are leading the charge higher this week with many up over 10% on Fed day, while not going down very much as silver was being heavily sold the past few weeks. It is a very bullish sign when silver leads gold. 
  3. Tax-loss selling is now waning and most who were going to sell for tax-loss, have already done so.

The miners historically lead the metal in both directions, so I would like to see them continue to do so after the possible major bottom reached on Wednesday. Nevertheless, whether it is THE bottom remains to be seen. The critical resistance level in GDX at the $25-$26 area needs to be taken out before I can be comfortable calling a major bottom in the precious metal miner 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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