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Lagging Silver May Be Telegraphing More Gold Weakness Ahead

Commentaries & Views

The U.S. Midterm Election ending without any surprises, and had stock prices soaring higher on Wednesday, while gold was essentially unchanged. With equities being bid higher, gold is losing an important safety-related support with the return of “risk-on” among equity investors.

Although the expected results saw just a 0.12% lift in gold, the GDX sold off into the close as most traders were awaiting the FOMC meeting decision the following day.

The Federal Reserve on Thursday held interest rates steady, signaling that it will stay the course and move rates up at a gradual pace in coming months. The central bankers left the core of its prior, upbeat, policy statement unchanged and looking ahead, investors see a roughly 80% chance of a December quarter-point move. The September “dot plot” showed a strong majority of Fed officials forecasting the fed funds rate would be a quarter point higher by year end. 

After the announcement, the GDX was bid higher into the close and has yet to fill the upside gap created on November 1st. The global miner ETF has remained in an uptrend since the September 11th low at $17.28, despite disappointing Q3 earnings reports from some of its largest holdings over the past few weeks. However, gold stocks typically lead the metal and the GDX/GLD ratio has begun to roll over, creating a head & shoulders topping pattern. Moreover, the GDX has been unable to close back above its 18-week moving average since the first week of July, when it began to break down after 18 months of trading in a tight range between $21-$25.

Meanwhile, December Gold weakened only slightly in after-market trade yesterday, despite the U.S. dollar rising strongly and closing back above its rising 200-week moving average on the Cash Settle Index. A close today above 96.40 would be a new 52-week high for the world’s reserve currency. As the greenback continues its climb higher, December Gold remains in a tight 4-week trading range between $1215 - $1240, having tested the ceiling at the $1,240 level twice this week before fading and dropping back.

The next potential precious metals catalyst may be the Italian budget crisis coming to a head next week. Eurozone finance ministers have called on Italy to revise its planned 2019 budget by November 13th, after the European Commission rejected the budgetary plans of Rome's populist coalition government. The Italian government insisted Thursday it is sticking with its plan to rapidly increase public spending as a dispute with the European Union over the budget intensified following the gloomy set of forecasts. The continuing crisis may bring some safe-haven bids into gold, along with the U.S. dollar next week.

However, the most troubling development in the precious metals complex is the persistent weakness of silver in relation to gold. The silver price typically leads gold in both directions and will need to turn around soon to assist bullion in having a sustainable move higher, or the complex may eventually break down with it. As the gold/silver ratio continues its climb, the hopes in gold to breakout of its tight trading range to the upside dampens.

SIL, the Global Silver Miner ETF, is in danger of making a 52-week low today, with the GDX remaining well above its recent low. Earlier this week, one of the ETF’s largest holdings and the world’s second largest primary silver producer, Pan American Silver Corp. (PAAS), disappointed the market when the company reported a Q3 loss, along with a revenue miss. The stock is down over 7% this week and is in danger of breaking below a 36-month consolidation low of US$13.50 if the silver price continues to weaken.

The bearish view has the GDX needing to hold its uptrend line from the September 11th low at $17.28, or we could see that low tested, or possibly broken, heading into the next FOMC meeting speech on December 19th. On the bullish side, if we get a weekly close above $1240 in December Gold, then the $1260 - $1265 region may be seen soon, along with a back-test of the $21 breakdown level on the GDX. To invalidate the November/December bearish outlook in the mining complex, the GDX would have to close decisively above $21 on a weekly basis. 

In anticipation of this possibly being a false bottom in the GDX, caution is advised and I recommend a large cash position in your precious metal portfolio. Stop by my website at www.juniorminerjunky.com and sign up to be on the free email list. You will receive this column in your inbox each week, along with interviews and updates on my subscription service availability.

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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