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Is Gold Forming a Bottom, or a Bear Flag?

Commentaries & Views

You would be hard pressed to find a shell-shocked gold stock investor who would like nothing more than the answer to this question. I will present a strong argument for both outcomes below, so that you, dear reader, can decide for yourself which way the gold complex may imminently break.

The bearish case:

The U.S. dollar is in a bull market and continues to receive most of the safe-haven bids gold investors are accustomed to enjoying during global equity weakness. Bullion has remained weak due mostly to the strong dollar and as long as the world’s reserve currency remains well above its rising 50-day moving average, its bull market will remain intact. Moreover, a weekly close above 97 on the Cash Settle Index may be enough to break the critical $1200 support level in gold on a weekly basis.

The continued political uncertainty in Europe has yet to entice consistent safe-haven buying in bullion as well. Trading in fed funds futures imply an 83% chance of a hike in December and one more hike in 2019, while the Fed’s dot plot implies three more interest rate hikes next year.

Aside from U.S. monetary policy, trade concerns continue to weigh on the gold price as investors await developments from the G-20 summit in Buenos Aires this weekend. A face-to-face meeting between President Trump and Chinese President Xi Jinping will also take place at a U.S hosted dinner between the two leaders after the summit. The president and his top economic adviser, Larry Kudlow, both made statements this week that cast doubt on the likelihood of a trade deal or framework that would prevent new or expanded tariffs on Chinese imports from taking effect in 2019. 

The silver price continues to lead gold lower and is trading dangerously close to its December 2015 low at $13.62. Most stop orders are located and placed based upon key technical support levels, so I expect a stop-run would be triggered if this critical price point were to be broken. As long as the gold/silver ratio continues its rise above 80-1, I expect the gold complex to remain weak.

The continued weakness in the oil price has also been a factor in keeping pressure on the precious metals. Commodity fund managers tend to shun gold when the oil price is weak, as oil is even more inflation sensitive than gold. Asset managers have historically used the crude oil price as a leading indicator for other inflation-sensitive commodities and since early October, the oil sell-off has been harsh, which is deflationary.

The bull case:

Earlier this week, during a speech at the Economic Club of New York, Federal Reserve Chairman Jerome Powell used a softer tone to describe where interest-rate policy is presently, in what could be construed as implying fewer interest-rate hikes to come. Although Powell said nothing to dull expectations for a rate increase when Fed policy makers meet next month, any hint of a shift in policy from tightening to easing during the FOMC speech on December 19th would be very gold friendly.

The set-up in the gold futures market is beginning to resemble the positioning of futures traders in early 2016. This past week, commercial traders went aggressively long and are not far from being net-long, meaning they strongly expect higher prices in the next few months. Meanwhile, managed money speculators are now net short, which is also both unusual and very bullish from a contrarian perspective. The positioning of gold futures provides a massive amount of short covering fuel if the Fed hints of a near-term interest rate pause in December.

Besides the usual “perma-bull” gold bugs, you would be hard pressed to find an objective gold sector analyst who is short to medium-term bullish right now, including myself. Major bottoms in this sector occur when the bear side of the boat is the most crowded.

We are seeing forced liquidity in many juniors on low volume, while both funds and investors are selling any sinking resource stock with a bid for tax-loss. While many are forced to sell regardless of individual company fundamentals, buyers on the sidelines seem to be waiting for the all-important question above to be answered before committing long-term investment capital towards resource equities.

Important Technical levels:

Both the GDX and gold have been attempting to base build, while their respective 50-day moving averages have begun to rise. However, the global miner ETF has yet to see consecutive weekly closes above its sinking 18-week moving average since February, making this line of resistance very important to clear convincingly before being bullish the miners. The GDX has formed a 5-month symmetrical triangle on its daily chart, which may come to a resolution by, or just before the FOMC meeting on December 18-19th.

Meanwhile, the $1250 level in gold is an important number to pay attention to. $1251 is the key resistance area on the upside, being the 38.2% retracement of the closing peak at $1360 in April and the closing low of $1184 in August. It is also the 50% retracement of the decline from the peak at $1377 in July 2016 and the December 2016 low of $1124. Most juniors who control high-margin projects in the development phase use $1250 gold as a base case for their completed PEA's as well. I feel we have to take out $1250, along with the strong resistance level at $21 in the GDX on a weekly basis close, before becoming bullish the complex.

On the downside, I would not like to see the $1180 level taken out on a yearly basis close, as it could open up a move down to $1160, or even $1124 in Q1 2019.

The recommended Strategy into Year-End:

I have advised my subscribers to continue holding a large cash position, while avoiding miners and especially optionality plays until we have a firm resolution of the aforementioned chart pattern in the GDX. However, I have placed stink-bids in few severely beaten down early stage exploration juniors on my watch-list.

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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.