Gold Stock Consolidation Continues in a Tight Range
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
(Kitco News) - The brief short covering respite in the safe haven metal this week reversed quickly after yesterday’s U.S. Labor Department report said its Producer Price Index (PPI) rose 0.6% in March, following February’s increase 0.1%. The data was significantly stronger than expected with economists’ forecasting an increase of 0.3% and brought heavy selling into the gold complex due to rate hike fears on the back of rising inflation.
After the higher than expected PPI data, Fed Funds Futures immediately began to erase the probability of a rate cut by Q1 2020 that was being priced into the marketplace since the Fed revised its dot plot last month. Before the data was released, there was a 75% chance of a rate cut in 2020 being priced into the market.
The PPI data also pushed the U.S. dollar up to back-test its rising 50-day moving average. Although gold’s outlook is not completely determined by the dollar, its continued strength above this important trend line would be a headwind for the safe haven metal. A prolonged rise in the world’s reserve currency would also serve as an incentive for investors to hold off on purchasing gold until the dollar shows signs of significant weakness. A weaker U.S. dollar would do the most to stimulate gold's near-term prospects.
Moreover, European Union leaders agreed in the early morning hours on Thursday to extend the Brexit deadline until October 31, 2019, postponing the UK’s departure about six months from the scheduled April 12 departure date. The extension is also notably longer than British Prime Minister Theresa May’s request for a June 30 deadline. But the EU also said, as part of its offer, that it would leave open the possibility that if Parliament manages to pass a Brexit deal in the coming weeks, the UK could exit the EU before the Halloween date. The extension dampened the safe-haven appeal in gold.
Another factor weighing on the gold complex lately has been a lessening of global trade fears. As progress is apparently being made on the U.S.-China trade front, investors have less incentive to purchase gold as a safe-haven. U.S. equities have also come back into favor in the last two weeks as "risk on" has re-entered the marketplace in view of the improved global outlook.
The gold price had been benefitting from Brexit uncertainty, along with the notable increase in central bank activity in the gold market. However, the current weak seasonal demand period, coupled with rising equities, has been largely responsible for its failure to remain firm. Based on these issues, gold investors should expect more volatility if the dollar remains strong and global equity markets continue to rise.
Gold prices holding firmly above strong support at $1280 this year, even as the U.S. dollar's strength has weakened gold's currency component, is a testament to the metal's institutional support. According to the World Gold Council, central banks added the highest level of gold reserves in 2018 in over 50 years. China's central bank also increased its gold reserves to 60.62 million ounces in March from 60.26 million in February. China has previously gone long periods without revealing increases in gold holdings. When the central bank announced a 57 percent jump in reserves to 53.3 million ounces in mid-2015, it was the first update in six years. The latest pause was from October 2016 until December last year.
In the meantime, from a technical perspective, there is resistance at $1330, $1350, and $1377. Strong support remains at $1280 and the 200-day and 200-week moving averages at $1251 and $1244 respectively. If the dollar breaks out decisively to a new 52-week high and continues to rise on a sustained basis, there is a strong probability of $1240 to $1250 support being tested quickly.
Since late January, the GDX remains in a tight trading range well above strong support at $21.50 and we have yet to see panic selling volume in the global miner ETF during this consolidation. There is critical support just below $21 at its 200-day moving average, which could be tested if gold were to sell down towards the $1240 to $1250 region during this decline.
While short-term issues have created a headwind for the gold price, the fundamental and technical factors I have mentioned in recent missives could still propel the gold price higher by later this spring. However, due to the aforementioned developments taking place this week, I continue to recommend caution in the gold complex, while maintaining long-term core holdings with a 15% to 20% cash position in gold stock portfolios.
Although the positive divergence of the miners and royalty firms in relation to the gold price is trending higher, many speculators are losing patience in the small and micro-cap junior space as we are now fully entrenched in the weak gold demand season. Low volume selloffs in quality juniors are creating buying opportunities for long-term contrarian speculators. 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/