Contributed Commentaries
Ten Reasons Why Gold Will Remain Above $1250 in 2019
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Gold and its miners have been attracting more attention since U.S. stocks started falling during the fourth quarter and interest rates began dropping. Bullion has gained 10% since its low in August and the GDX has risen over 20% since making its low in early September. The gold juniors have been playing catch-up after being sold for tax-loss into year-end with the GDXJ out-performing GDX since mid-December. Junior gold stocks have historically lagged the sector after the metal, its miners, and royalty firms have made significant lows.
In fact, the tables have turned in the marketplace since GDX hit its low on Sept. 11, 2018. Gold miners, which are historically the most volatile sector to trade before cryptos came along, have been steadily rising in the global miner ETF from the lower left to the upper right. In the meantime, equity investors who had grown accustomed to seemingly endless gains since the election of President Trump, are being whipsawed in “miner fashion” since October 2018.
Although the U.S dollar has been driven down hard this week, gold continues to have trouble breaking the $1300 level. This is no surprise, as there is very strong resistance in the $1300-$1309 region. A pause for consolidation is not only healthy after an 8% move higher since mid-November but justified when trading near this mark. In Q1 2018, we saw the highest volume of contract holders ever witnessed in the history of gold trading when the metal began to rise above $1300 and rose towards long-term resistance at $1375.
Since this record-breaking volume occurred at a relative peak for gold prices, a record number of traders who purchased the metal above $1,300 in early 2018 have been underwater. Now that the price is returning near their respective break-even points, traders and investors who utilize futures contracts are beginning to sell, despite what the U.S dollar is doing in the short-term. Although physical bullion holders may be less inclined to sell amidst such short-term volatility, institutions and funds who operate in futures contracts are generally more oriented toward short-term performance and have begun to sell.
Meanwhile, the GDX is consolidating near the $21 mark which continues to be a magnet since mid-December. In fact, the ETF has closed at $21 in the past 3 out of 4 sessions. This is no surprise either, as this region is formerly very strong support in the global miner ETF after being tested repeatedly since early 2017. When $21 was finally taken out last August, the breakdown became an alarm bell which ushered in a junior gold stock “capitulation phase” into year-end.
What was formerly critical support at $21 in GDX has now become strong resistance, however, the 200-day moving average just below this important level is attempting to become support and is beginning to flatline. A consolidation in the region, as opposed to a sharp move down from it when gold failed at its first attempt to break the strong $1300 ceiling, is encouraging. It appears as though breaking out of this consolidation towards long-term resistance at $25 in the global miner ETF will probably depend on gold breaking out above $1309 soon.
I find it incredibly ironic that the GDX may have made a major bottom on the anniversary of the incident which arguably began a generational gold bull market on September 11, 2001. Since that fateful day, which has been largely responsible for governments systematically enforcing more and more monetary restrictions upon us all, gold rose from $275 to over $1925 per ounce during the first leg of a secular gold bull market.
After a healthy consolidation period below strong resistance around the $1300 region, here are ten reasons why I feel gold will remain above the $1250 mark before eventually breaking out over $1375 later this year:
- The U.S.-China trade war and a prolonged U.S. government shutdown continues to be a risk to financial markets. If equities continue to whipsaw investors, gold will benefit.
- With the Democrats now in control of the House, political turmoil is expected to fuel volatility into the 2020 election as the opposition does its level best to have Trump impeached. This war against Trump is undermining the confidence completely in government as a whole, which is very gold friendly.
- The Fed minutes from last month’s meeting, released on Wednesday, contained statements that brought to light a much more dovish sentiment among Fed members regarding policy change.
- A more dovish Fed reduces the odds for rate hikes this year. The U.S. dollar has come under heavy selling pressure and formed a significant top due to the Fed’s policy change.
- The gold/silver ratio is trending lower, meaning silver has begun to lead gold higher.
- We are witnessing the Yellow Vest Movement spreading from France to resource rich Canada and Australia. In Canada, the Yellow Vests are protesting over environmental sanctions that block pipelines and creating employment in the energy industry. There is also a growing fear that this movement will engulf all of Europe as the eurozone agenda has been to raise taxes and lower the standard of living.
- The clock is ticking as the Brexit deadline approaches and a “no-deal” Brexit looks increasingly likely on March 29.
- Italy and Poland are forming an alliance being an anti-EU faction before the EU elections in May, which will no doubt provide more market turmoil.
- According to the World Gold Council, holdings in global gold-backed ETFs and similar products increased by 69 metric tons to 2,440t in 2018, bringing in about $3.4 billion in net inflows. Global gold-backed ETFs grew 3% in 2018 on strong demand for European funds and increased global inflows over December, making this the first time since 2012 that the value of gold-backed ETF holdings finished the year above $100 billion.
- Gold has made an accumulative “U” shaped bottom, which is typically stronger than a “V” bottom.
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