Gold Firms at Key Support Heading into FOMC Meeting Next Week
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When considering all-time highs being made in U.S. big board indices, coupled with a breakout in the U.S. dollar that is now trading at two-year highs, the resilience of June Gold holding the key support region at $1275 has been impressive. A combination of a strong dollar and declining risk aversion, due to the continued rise of equities, has been the main factors keeping pressure on the gold price.
But gold prices have recovered after hitting a four-month low of $1,265.90 an ounce earlier this week, despite expectations that prices could fall towards the 200-day moving average around $1,250. The safe haven metal has managed to stabilize above the key support level at $1275, while the market awaits the outcome of the next FOMC meeting on May 1st at 2:00pm EST. Late last year, with the intent of being more transparent in the market, the Fed announced there will be a press conference followed by each FOMC meeting, so I expect volatility to increase after the speech by Fed Chair Jerome Powell.
A move by the Fed on interest rates, or a communication misstep by the central bank on Wednesday, would likely end either the rally in the stock market, or in investment-grade bonds by the end of the year. This could also restore the traditional give-and-take between risk and safety, leading to more investment into gold.
During the last FOMC meeting, the U.S. central bank said it will soon stop letting bonds be purchased during its “quantitative easing” period following the financial crisis roll off its balance sheet, which also helped push yields on safe havens like Treasuries lower and acted as a tailwind for gold.
However, the market is now pricing in the possibility of the Fed deciding to raise rates again by the end of the year because of rising wages and other forms of inflation, such as rising crude oil and a much higher than expected CPI report released on April 10th. Since this has been taking place during weak demand season for bullion, the bears have gained control of the market.
Meanwhile, the GDX began to lead the safe haven metal lower recently, which has brought more selling into the higher risk juniors. The global miner ETF lost key support at $21.50 last Friday and has now dropped from $23.70 to $20.67 during this move lower since mid-February, a decline of 12.8%.
Once the $21.50 level was breached on a weekly basis close, the bears immediately began to work on closing an upside gap on the GDX daily chart, formed on January 25th, just above its 200-day moving average at $20.50. Although the ETF has become short-term oversold, there is an upside gap still remaining in the HUI Gold Bugs Index just above $150, so we may not see a significant bounce in the mining complex until this daily gap has been filled as well.
Over the same period, the mostly mid-tier miner fund GDXJ dropped from $35.04 to $28.61, or 18.4%, which was a leveraged move compared to both gold and the GDX ETF. The index has gone from a positive return of 5% at the end of Q1, to a negative return for the year.
Furthermore, the GDX/GLD ratio has rolled over and the price of silver is also beginning to lead gold lower. Up until earlier last month, we were seeing a positive divergence in the GDX over the price of gold since the low in the global miner ETF was reached last September. Any pullbacks of 7-10% were followed by strong pushes higher almost immediately and each dip was occurring at a successively higher low.
However, since the February 20th high, the index has seen a bearish change of character that's been confirmed with the weekly close last Friday below $21.50. In fact, the index is now in danger of establishing a lower low, which would invalidate the prior uptrend that began on January 2nd. A weekly close below $20.25 must be avoided to maintain this uptrend and we may get either a strong bounce, or further selling below the $20 level based on the market reaction to the upcoming Fed policy statement.
Ultimately, expect volatility until the end of Fed week more than anything else and since June Gold has not technically broken strong support at $1275, there is still a good chance of a possible bear trap being set here. But for this scenario to unfold, the gold complex needs a strong near-term catalyst to reverse the downtrend and get firmly back above $1300 quickly.
An equity reversal, coupled with a gold friendly FOMC speech may do the trick but I will continue to remain cautious and then reassess after the FOMC reaction has been digested by the market. May and June tend to be soft months for the resource sector and this year it appears as though May has come a few weeks early. I continue to recommend caution, while holding core positions and a 15 to 20% cash position in junior miner portfolios.
Historically, there is a very strong tendency for precious metals and mining shares to put in a major low at some point during the June/July time frame, before rallying into August/September. 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/