Has a False Move Lower in Gold Just Begun?
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As we head into a weekly/monthly/quarterly close later today, the distortion of the yield curve in the U.S treasury market has safe-haven capital fleeing into the U.S dollar over gold. In a recent blog post, global macro economist Martin Armstrong mentioned vast bids for U.S. 90-day T-Bills from around the world having no offers, as emerging markets come under a financial crisis, in part, instigated by Turkey.
Armstrong also stated in the post: “There is a major liquidity crisis brewing that could pop in May 2019. European Banks have loaded their portfolios with real estate loans thanks to quantitative easing and negative interest rates, and emerging market debt.”
Meanwhile, the world’s reserve currency has moved firmly back above its 50-day moving average, despite the Federal Reserve’s abrupt reversal last week towards a much looser long-term monetary policy. Although the strengthening U.S dollar index has served as a headwind at times to the recent uptrend in gold, both have been receiving alternating safe-haven bids.
However, since gold has recently begun to react more negatively to the greenback’s strength, the yellow metal sliced through its 50-day moving average yesterday and could move quickly towards strong support in the $1275-$1280 region soon. Unless this support zone is held next week, critical support at the $1240-$1250 level may come into play quickly.
One reason for expecting this crucial level in the safe haven metal to hold in the coming months, is the continued positive divergence between gold and gold stocks. The recent outperformance of the gold mining stocks vs the gold price has been a good sign, which suggests the metal’s price outlook will remain positive. Although gold closed well below its critical 50-day moving average yesterday, the global miner ETF has yet to test this crucial support line, or trade lower with panic volume during this corrective move down. The GDX/GLD ratio also remains firmly in its uptrend from last September.
Earlier this week, global miner and sector bellwether Barrick Gold (GOLD) had begun to break out of a year-long reverse head & shoulders basing pattern just below its 200-week moving average. However, as I type this missive, the stock has begun to reverse this move and needs a close today above $14 for the breakout to remain intact. Barrick, together with the second largest global miner Newmont Mining (NEM), have been leading gold stocks higher since the miner rescinded its below market hostile bid for Newmont and instead, stuck a joint venture deal on their collective Nevada operations earlier this month.
Both of these two mining behemoths combined make up roughly 20% of GDX holdings. Historically, when the largest miners are leading the gold stocks from multi-year lows, together with the GDX positively diverging from the gold price, a gold bull market is beginning to form.
Although the near-term technical situation in the gold price is becoming bearish, the fundamentals for a new long-term gold bull market are now firmly in place. Moreover, the futures market has priced in a 75% chance of a rate cut in December and even a 25% chance of two rate cuts beginning in September.
Throughout history, the gold price has a propensity for false moves lower, shaking off as many bulls as possible before a strong up-leg can commence. In 2008, we had a similar gold price situation begin to take shape in the global marketplace. Gold had reached major psychological resistance at $1000 just before the global financial crisis began to set in. But the miners back then had already made a huge seven-year run, making them ripe for a profit taking move lower before global margin call selling even started.
Gold stocks initiated its selloff eight months prior to the 2008 stock market crisis, which saw most liquid assets being sold during the global margin call panic, regardless of company specific fundamentals. The gold complex was the first to recover from the crisis with a “V” shaped spike low in September 2008. Leading up to the stock market panic, the gold price cratered over $250 in September after peaking at $1033 in January of the same year. This panic selloff shook out most of the remaining bulls before eventually reversing in sling-shot fashion near month end, eventually trading over $1900 just three years later without a significant correction.
However, the generalist investor view of the gold sector today can arguably be described as apathetic, when compared to the rampant bullishness in the sector leading up to the historic events which took place in 2008. The mining complex has been mired in a bear market for over seven years, while being mostly forgotten by the momentum players who flocked to this sector leading into the financial crisis over a decade ago.
Although we have seen some bifurcation of a few of the best in class juniors and a handful of miners, gold stocks arguably remain the last deep value space in the marketplace. Furthermore, the XAU/Gold ratio shows gold stocks being mired in a 20-year plus bear market in relation to the gold price, despite the huge gold bull market that took place between 2001-2011.
If we indeed begin to see a global financial crisis begin to take shape into the European Parliamentary elections in May, the downside should be limited in gold stocks as long as the $1240-$1250 region is not taken out on a weekly basis in the gold price. While many investors are flocking to the perceived safety of the U.S. dollar, gold should continue to attract enough safe-haven demand to keep the price above this critical support zone.
Meanwhile, the GDX will also need to hold its 200-day moving average just below $21 to spare many of the undervalued and generally ignored gold stocks from possibly revisiting late 2018 lows. It will be beneficial for gold stock speculators to keep a watchful eye on the uptrend in the GDX/GLD ratio above its 200-day line, along with the action of bellwether miners Barrick and Newmont as well. The abrupt selloff in the gold price this week is telling us more patience will be required for long-suffering resource stock speculators before gold can finally breakout of its nearly six-year basing pattern.
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