Three Month Gold Consolidation in Jeopardy
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As a possible near-term scenario mentioned in this column last week, the gold price has indeed been sold down to the $1300 level this week while the surging U.S. dollar has reached the 92 region on the Cash Settle Index. Although the GDX has done a yoeman job of keeping one step ahead of both gold and U.S. equities since early February, there are clear signals the $1300 - $1365 three-month range in gold may break lower soon.
The somewhat dovish comments from Federal Reserve Chairman Jerome Powell this week spooked gold shorts a bit, but neither the metal, nor the miners were able to sustain the quick burst of enthusiasm from traders after the U.S. dollar popped above its 50-week moving average on Wednesday. The worlds reserve currency has not closed above the 50-week average since March 2017, when it was rolling over after hitting a multi-year high above 103 in late 2016. This 50-week line will need to continue as resistance, or the gold freefall may accelerate through $1300 soon. A weekly close above this critical resistance line may bring the 95 level into play.
The short-term bounce off critical support at $1300 has been underwhelming, heading into the release of the U.S. Non-Farms Payroll (NFP) report. Although the market has priced in a 94% chance of a quarter point hike by the Fed in June, a better than expected NFP could increase the possibility of fourth rate hike this year and embolden gold bears. The NFP will be issued by the time this editorial is posted on Friday morning.
Gold investors have become uneasy with the continued strength in the greenback and equity investors have been shunning large cap stocks for possibly the same reason. A rising dollar can be negative for U.S. large cap stocks because it makes their exports more expensive. The buck has been getting a boost from the rising spread between U.S. Treasuries and European bond yields, while the S&P has tested its 200-day moving average for the third time since the equity correction began in January. Where the market closes relative to its 200-day line today will be an important test as both the Dow and S&P have not closed below their respective 200 day moving averages since mid-2016.
The U.S. dollar has become over-bought, so a short-term peak in the dollar index would almost certainly put a halt to the latest slide in the gold price. Meanwhile, the GDX needs a close above $23 soon for gold stocks to retain their bullish uptrend since early February. I would also like to see the silver price take the lead again, as it did so recently before succumbing to U.S. dollar strength. The dollar short cover rally quickly put an end to the silver short squeeze recently and the metals need silver to lead for the bulls to continue the bottoming process in the miners.
It has been my contention that the low has been seen in the GDX when the global equity mini-panic ended on February 9th. Nevertheless, it remains to be seen if the global miner ETF can survive the critical $21 area while seeing the possibility of gold losing critical support at $1300. Since the 2018 low was hit in equities, the miners have been receiving safe haven bids. However, the growing possibility of gold losing the 13 handle, due mostly to recent dollar strength, may begin to harbor more selling in gold stocks along with margin call selling if critical resistance at the panic low in equities fails to hold.
The gold price needs to maintain critical support above $1300, or we may see a stop run selloff down towards $1280 on this move down. If this scenario unfolds, then trend-line support just below $1250 may come into play later on, threatening the new gold bull which began in late 2015. Caution is advised as gold needs to climb back above $1330 soon, or risk breaking down out of the three-month consolidation channel and delaying the breakout bulls have been waiting for.