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Gold and the Miners Join the U.S. Dollar as a Safe Haven

Commentaries & Views

The underwhelming Non-Farms Payroll (NFP) release last Friday, coupled with a weakening stock market, has the street expecting the Fed will turn cautious next week and slow the pace of rate hikes in 2019. Although the November jobs report was strong enough to keep the Federal Reserve on track to raise interest rates again, the jobs data and stock market sell-off has given gold bulls reason to believe Fed Chair Jerome Powell may hint of a pause in the Fed’s rate-hike dot plot in his speech on December 19th.

The Fed has a difficult predicament to contend with regarding the current dot-plot. On the one hand, they desperately need to keep moving rates higher to try and avert a massive pension crisis building in the state and municipal levels. On the other hand, lobbying is growing intense for the Fed to pause with stock markets in turmoil due mostly to a rising U.S. dollar squeezing global debt, as much of this debt is denominated in the world’s reserve currency.

This conundrum has not been lost on investors seeking a safe-haven. After gaining 2% last week, gold saw its best weekly performance in almost nine months and has remained near the $1250 level this week despite the dollar trading close to its high for the year. On Monday, the world’s reserve currency rose over 0.60 percent while gold remained steady when UK Prime Minister Theresa May postponed the final vote on her BREXIT deal. This was a clear admission that she does not believe she can get the unpopular withdrawal agreement through the House of Commons.

May told the Members of Parliament (MP’s) that the only firm date was updating the Commons before 21 January, 2019, as decreed under the EU Withdrawal Act, indicating the vote might not happen before the new year. The deadline for a BREXIT deal is March 29, 2019 and Italy’s budget battle with Brussels remains a concern as well. With a growing lack of confidence in Europe, more safe-haven bids may continue into both gold and the U.S. dollar.

Furthermore, the gold/silver ratio, which had risen above 85-1 since early November, began to move lower earlier this week when President Donald Trump told Reuters he was pleased with the early progress in trade talks with Beijing. The President also said he would be prepared to meet with Chinese President Xi Jinping if it would bring the sides closer to a comprehensive agreement. If this ratio remains in decline, it would benefit the gold sector as silver leading gold higher is historically bullish for the precious metals complex.

Although gold has already recovered around 7 percent of the losses suffered this year between its January high and August low, it is still in an interim bear phase until it closes above its 200-day moving average at $1260, one of the most technically important benchmarks. A yearly close above this key trend line would all but confirm the bears have lost control of the intermediate-term trend and would also bring strong resistance at the .38% Fibonacci retracement at $1275 into play.

Meanwhile, we are also seeing safe-haven bids coming into the miners, led by sector bellwether and world’s largest gold miner Barrick Gold (ABX). Insiders have been recently buying shares in the open market and the stock is attempting to break-out of a year-long base. When gold stocks are forming a major bottom, the global miners and royalty firms generally lead and the juniors follow shortly thereafter.

Moreover, since the middle of February, 2018, the GDX share count has gone up over 54 percent from 309 million shares to 478 million, with the highest accumulation taking place during the September lows. A rising GDX share count is interpreted as a growing investors’ interest in getting involved in the precious metals market. 

The GDX has reached near-term resistance at the $20.50 level on low volume and is probably waiting on the Fed next week before breaking out, or breaking down. A yearly close above $21 in the global miner ETF, coupled with a 2018 close above $1260 in gold, would be very bullish for the precious metals complex going into 2019.

However, many of the quality juniors continue to be thrown away by investors regardless of individual fundamentals, creating very attractive entry points for long-term contrarian speculators. This year’s Tax-Loss Season has been particularly brutal, so resource speculators who have cashed up and patiently waited for this literal “golden opportunity” should be scaling into the best junior resource stocks before year-end. Any junior trading at a loss this year, which is most of them, is susceptible to tax-loss selling that historically peaks in the middle of December.

While the GDX is becoming over-bought, deep value opportunities are developing in the sub-$500M market cap growth-oriented producers, high-margin project developer/explorers, and cashed-up, early stage micro-cap juniors. It takes a lot of time and effort to find these opportunities and it is best to be on the hunt for them when the juniors are out of favor and being sold for tax-loss. When this sector turns, the stock prices in the quality issues move up quickly, so if you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/

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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