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Gold Unable to Break Out, So It Breaks Down

Commentaries & Views

Just two hours before the Cambridge House International Mining Investment Conference began in Vancouver on Tuesday, the gold price broke critical support at $1300. After trying repeatedly for three months, the safe-haven currency had been unable to break out above multi-year resistance at $1375.

As mentioned last week in this column, surging crude oil on the back of Middle East tensions had been supporting gold the past few weeks but the dollar, hitting a five-month high was too much for the bulls to continue trying to hold major support in the yellow metal. Once $1300 gave way, a stop run took gold down to the mid-$1280’s and we could see the $1280 region hit before an over-sold bounce takes place.

The retail crowd at the conference was very sparse, as the unseasonably warm weather and cascading gold price kept many of the over 2,500 who had registered from making the trip to the Vancouver Convention Centre. However, those who managed to show up had as much time as they needed to get information from the nearly 100 companies at the conference. I consider these mining conferences to be vital in establishing relationships with management of my junior resource stock investments and the low attendance to be an indicator of the “boredom bottom” continuing to form in the miners.

Although many of the small and micro-cap resource juniors continue to trade lower, the GDX has managed to remain well above critical support at $21. Moreover, when the gold flood gates opened on Tuesday and bullion closed down over $20, the major miner ETF was able to close above its 50-day moving average on just 60 million shares of volume. Historically, when such a critical and psychological support level has been broken, the GDX trades on much stronger volume of around at least 100 million shares. This tells me the sector may be running out of weak handed sellers in the miners.

During my presentation at the conference, I warned of possible continued gold-sector weakness into the next Federal Reserve Open Market Committee (FOMC) meeting speech on June 13. The 10-year U.S. Treasury Note surged above 3% and along with the U.S. dollar index, which pushed back above 93, was instrumental in the gold price losing the 13-handle. The world’s reserve currency now has a technical target of 95 on the cash-settled index and the yield on the 10-year Note may hit multi-year resistance at 3.20% on this move. The 3.20% yield area is major resistance which dates back to the 2008-2011 period and I expect this level is likely to put a lid on this rally. The possibility in both the dollar and the 10-year Treasury Note continuing to rise toward these technical targets, means miner investors should psychologically prepare for $1250 gold perhaps being tested before the FOMC meeting next month.

A few weeks ago, I warned my subscribers of this scenario possibly unfolding and to build up some cash. Although the market has priced in another rate hike next month, traders will be looking for clues to a conceivable fourth rate-hike taking place this year in the language of Fed Chair Jerome Powell’s speech and following press conference on June 13. An over-sold bounce should happen in the gold space soon but caution is still advised until the market has digested what the Fed has to say next month.

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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