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Gold Complex Poised to Break Out Led by Three White Soldiers

Commentaries & Views

Three white soldiers is a bullish candlestick pattern that is used to predict the reversal of the current downtrend in a pricing chart. The pattern consists of three consecutive long-bodied candlesticks that open within the previous candle's real body and a close that exceeds the previous candle's high. The pattern suggests a strong change in market sentiment in terms of the stock, commodity or pair making up the price action on the chart.Investopedia

During the last two market sessions in May, this bullish technical pattern began to form on all of the most widely followed gold sector ETF’s and Indices. The SPDR Gold Shares Fund (GLD) and both Van Eck Gold Miner Funds (GDX, GDXJ), along with the HUI & XAU gold indices, began to move sharply higher from a month-long accumulative base. Last week's surprise tariffs decision announced by President Donald Trump on Mexico was largely responsible for creating the second white soldier on May 31st, with the economic fallout threatening the U.S. economy and, by extension, the U.S. dollar.

Rising expectations that the U.S. Federal Reserve will cut interest rates and ongoing global trade tensions were responsible for creating white soldier number three. St. Louis Fed President James Bullard told news service Bloomberg on Monday that the U.S. Central Bank may need to cut interest rates soon to prop up inflation and counter downside economic risks from an escalating trade war.

During a speech in Chicago on Tuesday, Federal Reserve chairman Jerome Powell created bonus white soldier number four when he signaled that the central bank is ready to cut interest rates if necessary. Although Powell didn't explicitly say what the Fed would do, expectations began to rise that the Fed will cut rates at least once and possibly two or more times before year's end, in part because of the consequences of the trade war.

Then on Wednesday, ADP released its most disappointing report since March of 2010, saying that only 27,000 jobs were created in May. The number missed expectations by a wide margin, as consensus forecasts were calling for job growth of 185,000. Gold prices were in positive territory ahead of the report, then raced quickly towards strong resistance at $1350. The following morning, The Wall Street Journal posted Fed Begins Debate on Whether to Cut Rate as Soon as June, hinting the Fed may begin another round of quantitative easing.

Fear on Wall Street has risen sharply since last week, bringing more safe-haven bids into gold. Once bullion completed a six-week base of strong support at the $1275 region two weeks ago, the yellow metal began to de-throne “King Dollar” as the safe-haven of choice when U.S. equities began rolling over in earnest. Since the Fed is now planning rate cuts, this has put a huge question mark around the attractiveness of cash versus gold ownership as a safe-haven.

Moreover, the world’s reserve currency appears to be in the process of breaking down from a bearish ending diagonal pattern, which has been slowly trending upwards until the end of May. This breakdown attempt has been a strong wind behind gold’s back. The safe-haven metal rose $70 in just five trading sessions into Wednesday before some profit taking came into the market as gold tested February resistance just below $1350.

Although the miners have begun to lead the gold price higher, sister metal silver remains bogged down as its industrial component continues to be pressured by trade war fears. The gold/silver ratio remains at multi-year highs above 90. Past spikes above this number in the closely followed ratio have preceded precious metals bull markets in which silver outperformed gold. The last time this ratio made a spike high above 90 was during the financial crises in late 2008, when speculative money entered the precious metals complex en masse and gold stocks began a new multi-year up-leg.

Furthermore, speculators in silver futures, who are usually wrong at big turning points, have become aggressively bearish and are now net short. ETF’s have been net sellers of over 11m oz. year-to-date, reflecting poor sentiment. The last time speculators were comparably net short was in September 2018, when silver was putting in a bottom that preceded a nice run through February of this year.

The next FOMC meeting is on June 18-19, with an OPEC meeting June 25-26, followed by a G-20 meeting June 28-29. Needless to say, there will most likely be a great deal of market action around the headlines that come from these meetings. A monthly/quarterly close above $1362 in gold futures, which is just $20 from Thursday’s August Gold close, would technically signal a completion of the 5+ year base in the safe haven metal. 

As I type this missive, gold has initially reacted very favorably to the disappointing Non-Farms Payroll (NFP) report issued this morning. The U.S. created just 75,000 new jobs in May and employment gains in the prior two months were scaled back, an ominous turn that points to a slowing economy and is likely to put more pressure on the Federal Reserve to cut interest rates.

Although we may see some healthy consolidation of the recent move to nearly $1350 heading into the FOMC meeting over the next few weeks, I feel the downside is limited. Trade wars, Trump tweets and a back-pedaling Fed will make for an interesting June that may give a huge boost to the gold complex during what is traditionally a very boring month.

While the global miners and royalty firms have made considerable moves to the upside recently, shell-shocked junior gold stock speculators are waiting for a confirmation of a breakout in bullion before coming back into the more higher risk stocks in the complex. Gold has been beaten back six times from the $1350-$1375 region over the past 5+ years, which has made resource speculators overly cautious of yet another failed attempt at breaking this very strong “Maginot line” of defense at $1375.

However, we now have a few catalysts in place to possibly break this multi-year resistance line soon. The bullish trend in the gold complex will continue to be supported by trade war tensions. As a result, further weakness in global economic data or new comments from Federal Reserve Chairman Jerome Powell which indicate substantial reductions in interest rates will influence further gold demand.

Gold priced in other major currencies have already broken their respective consolidation ranges and are trading at or near all-time highs. Once the market begins to price in gold finally breaking out of its huge 5+ year basing pattern in U.S. dollars, along with the GDX breaking strong resistance at $25, we could see a triple digit percentage rise in the global miner ETF like we saw in early 2016. But in order to provide enough capital inflows to do so, we need to ultimately clear these important technical hurdles. As I pointed out in last week’s column, the gold equity complex is back trading near its 2008 bottom and is one of the few sectors priced near the lows of the depth of the financial crisis.

The gold picture is quite clear: this sector is so beaten down that a technical signal of a breakout in bullion would bring the momentum crowd pouring into this deeply depressed sector. Not to mention funds which are underweight, and in many cases have very limited to no exposure to the entire precious metals complex. The big advantage the gold sector has is size, or rather the lack of it. If we see a larger move in gold, it will be magnified in precious metal stocks as traders seek a piece of a sector that is less than 1% of the broader market.

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