Miners Lead Gold Lower After Fed Dampens Rate Cut Hopes
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The gold complex was hit hard on Wednesday and selling continued yesterday, while comments from Federal Reserve Chairman Jerome Powell appeared to dampen hopes the central bank could move later this year to cut interest rates. In its policy announcement, the Fed held rates steady as expected and struck a cautious tone on inflation. But Powell, speaking during the press conference following the Fed statement, said a decline in inflation this year could be due to “transitory factors”, which is a common phrase used by Fed officials who do not want to react to every data point.
The gold complex began to sell off quickly as Powell did not give any indication of a future rate cut during the Q&A session, while saying the Fed is "strongly committed" to its 2% inflation target. He also said Fed policy is still appropriate, even though core inflation has been softer than expected and would not be baited into discussing hypothetical recession scares.
Since the last FOMC meeting in March, Fed funds futures had been pricing in at least one rate reduction by the end of the year on views by some in the market that the Central Bank might make a preemptive bid to head off lower inflation or a recession by cutting rates. But once Powell convinced the market there was less of a chance the Fed will cut U.S. interest rates anytime soon, the gold complex was hit with more selling.
While June Gold continues putting up a strong fight to maintain key support at $1275 on a weekly closing basis, the selling in the GDX has begun to accelerate and silver is also leading gold lower again. With the global miner ETF making a lower low yesterday, the gold/silver ratio exploded to the upside on Wednesday, which hints that the next level of strong support at $1250 may be tested in June Gold soon.
Moreover, many of the junior stocks in the gold space are being sold aggressively and investors are seeing bids dry up as they attempt to unload losing positions in micro-cap resource shares. During the past few weeks, many Canadian speculators ramped up selling just about anything with a bid in the mining space as the deadline to pay any tax due for 2018 approached on April 30th.
This morning, the Non-Farms Payroll (NFP) report revealed the U.S. created 263,000 new jobs in April to help drive the unemployment rate down to a 49-year low of 3.6%, the latest cue pointing to a rebound in the economy after a slow start in the new year.
"Gold's resilience in the face of the strong jobs report suggests recent selling pressure has at least temporarily exhausted the bears, and the yellow metal is due for at least a respite from downside pressure," said Jim Wyckoff, senior technical analyst at Kitco.com.
Meanwhile, the negative impact on gold investments due to an increase in the U.S. dollar’s value continues to put pressure on the safe-haven metal. The world’s reserve currency is in the opposite condition as gold, with the greenback above its rising 50-day moving average, as opposed to gold threatening to break down towards is 200-day moving average.
Both of the dollar’s 50 and 200-day moving averages are rising at a health rate which implies a large measure of built-in upside momentum for the buck. During a continued rise in the U.S. dollar, bullion would be hard pressed to maintain price support during this weak demand season that can last until strong physical demand typically begins later in the summer.
However, US stock markets are entering a big resistance zone and have begun to roll over since short-term interest rate futures began trimming bets the Fed will cut rates before the end of the year. A steeper correction in equities during a “sell in May and go away” scenario, would bring some safe-haven bids into the gold space.
Furthermore, we could begin to see global equity volatility heat up during the European Parliamentary elections later this month, which would assist in maintaining the $1240-$1250 region the gold price. Many have lost faith in the international organizations ability to improve their lives as the Yellow Vest Movement continues to wreak havoc in several EU nations. And with Brexit still looming, together with nationalist populism on the rise, this year's election - a political event held every five years - is seen by many as decisive for its future.
I have been advising gold stock investors, by means of previous writings in this column, to continue holding core positions in the gold space, while maintaining a large cash position. I will remain cautious in the precious metals complex until we see the gold price rise firmly above $1300, along with the GDX closing back above $21.50 on a weekly basis.
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/