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Gold Stocks Have Some Serious Catching Up To Do

Commentaries & Views

In last week’s missive, I mentioned the probability of a near-term bounce in gold stocks, based on how over-sold the sector had become during “panic week” in the global marketplace. A few hours after the article was posted and with the GDX down a further 3% last Friday, the last fifteen minutes of trade in the major miner ETF was bought heavily back to unchanged on the day. The late reversal off critical support at the $21 level, coupled with huge volume of over 100 million shares traded, is a good argument for a possible long-term bottom in the miners being seen.

Then on the following Wednesday, the U.S. Consumer Price Index (CPI) for January was released an hour before the market opened. The gold price immediately dropped $15 in minutes on the stronger than expected consensus forecast of an increase of 0.5% in January, after increasing 0.3% in December. Computer-based algorithm trades were set to sell gold on a higher inflation figure, based on the anticipation of another rate hike after the next Federal Reserve Open Market Committee (FOMC) meeting in March being bearish for the precious metal.

But a very unexpected market move happened on the way to another rate-hike related beating of the gold space. When the market translated the 0.5% rise of January inflation into a year-over-year gain of 2.1% versus expectations of 1.9%, the gold shorts began to cover quickly. By the measure of the CPI, inflation is already above the Fed's 2% target, so the market began to focus on the Fed’s dot plot lagging inflation, as opposed to the better odds of an upcoming rate-hike in March. The gold price blew through resistance at $1330 and ended the day reversing nearly $35 to the upside, with the gold stocks outperforming by over 2x on nearly 90 million shares traded in the GDX.

The strong bounce off critical support in the major miner ETF has now paused at the $23 area, which I mentioned last week as a strong resistance level before possibly heading back down for another move lower. Due to the surprisingly strong upside reversal with large volume off the $21 level in the GDX last Friday, coupled with the equally strong buying reaction of the CPI report, I am no longer expecting a sharp move below $21. However, this is still a possibility if we see more panic in the global market place next week, so a bit of caution and cash is still advised as gold stocks have been trading with the US market since the panic move lower began last week.

Meanwhile, the U.S. dollar has continued to weaken since back-testing and reversing from the 90.50 area on the Cash Settle Index at the beginning of this week. The weekly chart has formed a bearish flag and could target the 86 region if the U.S. market continues higher, while stock market volatility has also been declining. An 86 print in the greenback could easily push gold, which has now formed a very bullish cup & handle formation on the weekly chart, towards long-term resistance at the $1375 level. As previously mentioned in this column, a monthly close above $1375 would be technical confirmation of gold being in a new bull market.

Another reason to be short-term bullish in the precious metals sector is the speculators position in the Commitment of Traders (CoT) report for silver, which was posted last Friday. The net spec position in silver is only 30.5K contracts, or 14.9% of open interest. Since the CoT reports only contain information as of the previous Tuesday, these figures could be even more bullish, when considering the panic into cash which ensued in all markets until the following Friday. We will find out later this afternoon, when the latest precious metal CoT reports are released at 3:30pm EST.

Silver has practically been given up for dead by the market recently, as the gold/silver ratio is now above 80-1. The last time this ratio was at that level in January 2016, gold stocks began a huge 180% move in just 6-months, while silver, along with silver miners, outperformed both gold miners and bullion.

The Chinese market is closed until February 22nd, which also happens to be Options Expiration in gold. Many have claimed Options Expiry day in the precious metals to be a manipulators paradise for making sure most gold call options at key price points expire worthless. Watch the $1350 level closely, as there are quite a few in-the-money options at this price and traders must decide if they want to keep their futures positions, or roll them over into the following month. This will probably add to the short-term volatility in bullion next week.

If the market continues to focus on the Fed being behind the inflation curve, as opposed to fearing future quarter-point rate hikes, then gold stocks have some serious catching up to do with the gold price. Keep a sharp eye on the $25-$26 level in the GDX, as I expect a big move higher once this critical resistance level has finally been broken. In the meantime, a bit more patience may be required for frustrated gold stock investors.

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.