Hints of More Monetary Stimulus and Middle East Fears Goose Gold
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Although not a surprise to readers of this column, long suffering gold bulls are finally being rewarded this week as the safe-haven metal has broken out well above five-year overhead resistance at $1375. The move has caught many investors off guard while on vacation, as market summers have long been bullion’s weakest time of the year seasonally with the June/July time period simply devoid of the big recurring demand spikes seen during most of the rest of the year.
However, gold also has a habit of beginning huge up-legs when most are not paying attention. The combination of a weaker dollar, falling yields and Middle East tensions have lifted gold by nearly 4% so far this week - its biggest rise since the week ended April 29, 2016. Since Wednesday, bullion has risen as much as $70.
The global central bank loose monetary policy jawbone party began in earnest on Tuesday, when ECB head Mario Draghi signaled Europe could go back to monetary stimulus in order to boost the economy if the signs do not improve. With the central bank having already destroyed its bond market with historically low interest rates, more rate cuts seem limited so the Quantitative Easing program could be reimplemented to create money to buy back bonds.
The ECB vice president Luis de Guindos stated on Wednesday that another bond-buying program could be an option if inflation does not reach its intended target. The ECB aims at inflation rates of below but close to 2% over the medium term. As of last month, the annual non-seasonal adjusted rate was around 1.2% and has rarely been over the target level since 2013.
When the Fed lost its “patience” stance and suggested potential rate cuts after the FOMC meeting later on Wednesday, the dollar posted its biggest 2-day drop in a year and gold is continuing to reap the rewards from weaker bond yields amid a growing chorus of more dovish central banks around the globe. As mentioned to be a very real possibility last week in this column, August Gold zoomed to $1397 while the world’s reserve currency broke down from its bearish ending diagonal pattern in overseas trade late Wednesday evening.
Once Fed Chairman Jerome Powell started to speak at the news conference following the FOMC meeting speech, the CME's FedWatch Tool began showing a 100% chance that the Fed will cut rates at its meeting in late July. The tool gave an 87.1% chance of a 25 basis points (bps) cut, a 12.4% chance of a reduction of 50 bps, and even a 0.4% chance for 75 bps.
Not to be outdone, the Bank of Japan kept monetary policy steady on Thursday but Governor Haruhiko Kuroda signaled readiness to ramp up stimulus as global risks cloud the economic outlook, joining U.S. and European central banks in dropping hints of additional easing.
Moreover, developing and emerging market economies have also seen a major decline in currency valuations, keeping gold well bid in all their respective currencies. As central banks contemplate rate cuts and economies perform poorly, global devaluation becomes increasingly likely making gold more attractive.
Global trade developments are the biggest risk for central banks and also for market sentiment in general. As such, the next big risk event for markets and gold will be next week's G20 summit where we should see Trump and Xi meet up to discuss trade relations between the two countries. If US-China trade talks fail to get back on the right path, it will lay the groundwork for central banks to stay dovish and the pessimism will also benefit gold two-fold in this scenario.
Simmering in the background have been tensions in the Middle East providing more fuel to gold’s fire. Late Wednesday, news of Iran downing a US drone hit the news wires, adding more safe-haven buying to the pop in gold. The U.S. Central Command leaders said the attack was “unprovoked” and it took place in international airspace, while Iran claims it was over their territory.
US President Donald Trump then authorized U.S. military strikes against Iran on Thursday but officials abruptly pulled back from carrying them out just hours later. Gold prices steadied after shooting up to a near six-year high on the incident in overseas trade, surpassing the key $1,400 level.
Meanwhile, U.S. equities have been unfazed by Middle East pressures thus far and are trading at all-time highs again. Many gold sector pundits have been conveying equity strength as a deterrent for gold miners going higher, but it appears as though the metal may have finally joined the “everything bubble” with the Fed expected to assist global central banks with a loose monetary policy going forward.
Despite the equity strength, the GDX has been leading gold higher since this move began in late May and reached long-term resistance at the $25 region yesterday. The global miner ETF has been up 16 of the past 17 sessions and contains multiple upside gaps, including an island reversal in its extreme overbought daily chart.
Although gold will not technically be in a bull market until we see a monthly close above $1362, I expect to see miner weakness continue being bought as long as August Gold remains above $1375 into next Friday. The gold closing in June one week from today will be critical, as it is both a monthly and quarterly close with many big money momentum traders and fund managers keeping an eye on the $1362 level.
In fact, there are many factors in the bullion’s favor, which could see gold running to $1,700 per ounce into year-end. Global economic data has been poor, creating a weak macroeconomic environment, combined with low bond yields and a soft U.S. dollar. Major economies are slowing down, with two of the biggest—the U.S. and China—fighting a trade war, along with global central banks continuing with collective loose monetary policies. Not to mention tensions rising daily in the Middle East.
Now that gold has broken the $1375 level, frustrated gold complex speculators have begun to be rewarded for their patience. Considering the breakout in gold this week, it might be a good idea to pay close attention to junior resource stocks, with a large number selling for pennies on the dollar. Many of the lagging developers and early stage exploration micro-caps have finally begun to move up this week with the quality issues starting to outperform the miners and royalty firms.
Furthermore, now that gold has broken out of a nearly six-year base, severely undervalued and best in class juniors may begin to outperform most assets once the GDX has a weekly close above $25. 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/