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A Few Bullish Undertones as Gold Corrects Recent Gains

Commentaries & Views

The continued strength in gold this year alongside the strong bounce in the stock market has been impressive. While global equities have taken investors on a roller coaster ride since late 2018, the gold price has gained 10% from its August 2018 lows with hardly a pullback along the way. With this move becoming long in the tooth in both price and time, it is only natural to expect gold to give back at least a small portion of its recent gains. The Chinese market has also been closed this week for the Chinese New Year Holiday, taking a huge demand component out of the sector.

Furthermore, after testing its rising 200-day moving average last week, the U.S. dollar has rallied and closed above its 50-day moving average on Thursday. Although gold has remained firmly atop $1300, the closing above this widely watched benchmark trend line is making many gold traders nervous, and rightly so, given gold’s sensitivity to the world’s reserve currency’s dominant trend. Most analysts feel the greenback has put in a long-term top, so if the recent downtrend does not resume soon, the gold complex could come under increased selling pressure in the coming days and weeks.

Meanwhile, the past two weeks of trade in January saw fund managers who are under-exposed to gold miners, send the GDX soaring 13% into the end of the month last Thursday. After financial advisors were being questioned by clients as to why they were under-weight the best performing asset class over the past six months, month-end fund buying was largely responsible for taking the GDX up eight consecutive trading sessions into the last day of trade in January.

Nevertheless, the global miner ETF was also due for a pullback after strongly outperforming gold since bullion began trading above $1300 a few weeks ago. After nearly reaching resistance at $23 by the end of January, lower volume profit taking this week has made for an orderly decline so far. This is healthy action, as opposed to dashing long-suffering gold stock speculators hopes yet again with a high-volume, intraday red candle reversal after the sector had become overbought. There is good support at the $21.50 level and stronger support just below $21 at its 200-day moving average.

However, while the GDX has been correcting its recent gains, there have been a few bullish developments taking place in the sector this week. A few of the silver juniors which I own, and/or follow, have been rising strongly as the gold space corrects. Historically, when silver leads gold higher, it is bullish for the complex. But silver juniors outperforming the gold complex has historically been an indicator of a significant sector bottom being in place. There also has been numerous individual junior gold stocks flashing buy signals, along with a few others trading at multi-year highs.   

Moreover, according to a new report by the World Gold Council (WGC), holdings in global gold-backed ETFs rose 72 tonnes in January to reach 2,513 tonnes (80.8m troy ounces), hitting the highest levels in nearly six years. The industry body says the inflows were driven by market uncertainty and a shift in sentiment that drove the price of gold 3.5% higher in January.

Also in the report, the WGC said it believes “net longs increased yet remain below historical averages.” But that remains to be seen with both sentiment and positioning in Comex futures in New York being unclear at this time due to the U.S. government shutdown.

However, with the ending of the shutdown, at least temporarily, we might finally get a COT report today at 3:30pm EST. Expectations are that speculators have increased their long position dramatically. The question is by how much.

There is strong support at the $1280 level of the gold futures price and this number has held firm after being tested multiple times in January. The market consolidated below the phycological $1300 level for the first three weeks of 2019 and the safe-haven metal has cleared this important number in convincing fashion. The Fed’s policy shift last week was a very gold friendly event, so I do not expect this region to be broken on a weekly basis close unless the U.S. dollar continues higher.

Nonetheless, if the $1275 level is taken out, look for strong support at the $1240-$1250 level to come into play. The GDX will also need to stay well bid above its 200-day moving during this correction, or I would be concerned that something has gone amiss. In the meantime, this sector remains a stock pickers market until the GDX can finally muster a weekly close above long-term resistance at $25.

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