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Gold Poised to Continue Higher into Chinese New Year

Commentaries & Views

With some profit taking on tap when gold’s 6-week rally paused for a bit last week, the GDX has been sold down to strong support at the $23 level. The major miner ETF move up from its mid-December low was stopped cold just before it could reach long-term resistance at the $25 region, when it had a strong volume intra-day reversal from this critical level on January 25th.

Since then, the miner price action leading into Federal Reserve Chairwoman Janet Yellen’s farewell FOMC speech and this morning’s release of the US Non-Farms Payroll (NFP) report should not be surprising to veteran miner sector investors. Virtually every FOMC meeting and NFP report during this US interest rate hike cycle beginning in late 2015, has been sold into by precious metal investors and computer-based trades. The gold sector continues to be sold into these reports despite the fact that gold has risen during each Fed Funds Rate-hike cycle since Bretton Woods collapsed in 1971, when President Richard Nixon severed the link between the dollar and gold.

Due to the double whammy of both an FOMC meeting and the NFP report being released during the same week, gold stocks have been hit particularly hard this week. Nonetheless, gold has a tendency to rise shortly after the US NFP has been released during this rate-hike cycle, as algorithm based selling is met with value investor buying in the quality miners.

Even though the slumping US dollar was over-sold going into the FOMC meeting this week, the Fed basically guaranteeing another rate-hike at the upcoming March 20-21 conference was unable to bring any long-term buying into the greenback. This is very bullish for gold and as I type this missive on Thursday evening, the buck has closed at 88.50 support on the Cash Settle Index. On a technical basis, if this level is substantially breached, we could easily see a further decline of 2 to 3% in the short-term which would take the index to the next support level in the 85 region.

The gold rise since mid-December has coincided with the US dollar’s freefall that began just after the Fed raised interest rates for the fifth time since the rate-hike cycle began in December of 2015. If, in fact, the U.S. dollar does break below the critical support level at 88.50 and quickly falls down to the 85 area, we could easily see gold prices gain 2 to 3% which would take the spot price to just about $1400 per ounce. The miners have been lagging since the aforementioned intra-day reversal in the GDX and could easily test long-term resistance at $25-$26 level to catch-up with the gold price if this scenario unfolds.

Meanwhile, the yellow metal has been consolidating above strong support at the $1330 area, which has seen steady buying come in whenever the spot price has been sold down near this level. The late January to mid-February time-frame has been seasonally bullish for gold as solid Chinese New Year demand heats up leading into “Golden Week”, which begins on February 15th. With continuous buying coming in from China, combined with a continually weak US dollar, I am looking for gold to possibly challenge the $1400 region and the GDX to simultaneously challenge the $25-$26 area leading into Valentine’s Day.

However, if this scenario unfolds going forward, I would also expect a correction to begin while the Shanghai gold exchange is closed for Golden Week in mid-February and possibly continue into the March 20-21 FOMC meeting. This would be healthy action, while working off a short-term overbought situation before gold and the GDX can finally breach these long-term resistance levels on a monthly basis and begin to move significantly higher later this year. On the other hand, if the $1300 level is breached in gold, then I would be looking for long-term critical support in the GDX at the $21 level to be tested and the now 18-month consolidation in gold stocks to possibly continue into Q3 of this year.

On a side-note, in mid-December I stated the following in this column: “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.” I have received quite a bit of hate mail for my outspoken comments on bitcoin, even though this statement may very well have already been proven correct. The last low in the gold price was on December 12th, when the spot price hit $1238 and the bitcoin top was on December 16th, when the cryptocurrency nearly reached $20,000. The chart has since formed a nasty head & shoulders top and is currently trading well below $10,000, as governments place new restrictions on the cryptocurrency and many businesses have ceased to accept payment in bitcoin.

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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