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Gold Continues to Climb a Wall of Worry into 2019

Commentaries & Views

Gold prices hit their highest price in six-and-a-half months on Thursday, as volatile equity markets on the back of weak US data heightened fears of a global economic slowdown, propelling the safe-haven metal towards a potential third straight weekly gain. The equity sell-off is beginning to pose a systemic risk, which has investors worried as equity losses are exposing the fact that markets were far more fragile than they appeared heading into year-end.

Two years of rate hikes and erratic political leadership has investors expecting a sharp downturn in 2019. So much so that Fed futures are now showing that most participants are predicting zero rate hikes this year. This assumption gained more traction after the market closed its first trading session of the new year on Wednesday, when Apple Inc (AAPL) announced its first revenue guidance contraction in 12 years, along with weaker Chinese IPhone sales. The news from the technology giant sent investors fleeing into bullion and influenced the Australian gold price to trade at an all-time high on Wednesday evening, while Canadian dollar gold inched toward $1750 per ounce in yesterday’s session.

Meanwhile, gold futures denominated in U.S. dollars is backing off from strong resistance at the $1300 mark after the last U.S. Non-Farms Payroll (NFP) report of 2018 was released this morning. The report came in much better than expected, presenting a quandary for the Federal Reserve and Wall Street. While other reports suggesting the economy is slowing, a tight labor market and rising wages could also put upward pressure on inflation. The Fed has to keep inflation at bay without slowing the economy when it raises rates.

Another bullish development in the gold complex began to take place during the last few trading sessions of 2018. The gold/silver ratio began to move lower, meaning silver is beginning to lead gold higher. The rally in silver, coupled with the out-performance of the juniors since last week, has given further confirmation of the two month move higher in the gold price. Historically, it is best to see silver trend more or less in line with the gold price. Otherwise, if the two metals are diverging from one another, the odds are high that a gold rally will quickly reverse.

The recent weakness in the U.S. dollar index is another major reason behind silver’s latest rally as it appears to be rolling over, while remaining below its 50-day moving average. Continued weakness in the dollar will further ensure gains for both gold and silver, although a declining dollar index isn’t necessary if global markets remain in turmoil. The important issue is that the dollar index isn’t trending higher, for when it is, it severely erodes gold’s currency component.

What is also encouraging for gold bulls is silver has now begun to de-couple from sinking base metals while leading gold higher, as opposed to being previously sold down for its industrial qualities. In addition to this week’s Apple report on weaker Chinese iPhone sales, Chinese manufacturing activity during December fell below 50 for the first time in nearly two years, which means the world's second largest economy is contracting. The Chinese economic weakness, together with the ongoing U.S/China trade war and the global economic slowdown, has both copper and zinc charts creating ominous head & shoulders topping patterns on a weekly basis, while silver continues to rise with gold.

In my last missive of 2018, I mentioned junior gold stocks being the best deep value play for this year. Many of the quality companies have already seen strong moves as tax-loss selling is now mercifully behind us. Although the gold rally is becoming over-extended, I feel the impact of its inevitable correction on the juniors will be minimal, since most were sold down much more than the gold price during a particularly brutal Tax-Loss Selling Season last year.

I strongly believe the junior precious metal equity space has formed a significant long-term bottom, which will morph into the next leg higher in the complex by mid to late 2019. The TSX-V was hit for over 40% in 2018 before producing a big white candle during the last week of trade and is forming another this week. The Canadian junior index was hit hardest as gold was forming a bottom over the past few months, making the risk/reward the most attractive I have seen in the junior resource space since December 2015.

While the GDX was working off a short-term overbought situation by trading just below strong resistance at $21 the past few weeks, it appears as though we may get a weekly close above this important price point today. The 200-day moving average in the global miner ETF lies just below this mark and is maintaining support, while beginning to flat-line. The rising 50-day moving would give us a bullish cross if GDX can make a run towards $25 soon. Even though both gold and silver have moved into technically overbought territory, sentiment indicators remain in neutral territory, meaning investors have not become overly bullish on precious metals yet.

After much laborious research and chart watching during Tax-Loss Selling Season, I spent the last few weeks of a frustrating year completing long-term positions in a basket of gold and silver juniors. 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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