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December gold continues to consolidate above $1500

Commentaries & Views

With market volatility increasing and the global economy flashing key warning signs of an impending recession, overbought December Gold continues to consolidate recent gains in both price and time above $1500. Although the gold complex is showing signs of distribution taking place after becoming extreme overbought last week, the safe-haven metal has refused to break down for a healthy correction while awaiting a catalyst to make its next big move.

Since the Federal Reserve's decision to cut interest rates has been the biggest driver behind this extended rally in gold, the sector may receive a major catalyst this morning. Markets are now focused on Fed Chair Jerome Powell's opening speech at 10:00am EST today, which kicks off the annual Jackson Hole Economic Policy Symposium scheduled for August 22-24 in Wyoming.

The conference is one of the most famous and important gatherings of central bankers, policy experts, academics, and leading financial market players. Investors will be looking for clarity on the direction of U.S. monetary policy from Powell, especially after an inversion in the Treasury yield curve last week highlighted the risk of the U.S. economy falling into recession.

Which direction the gold complex takes next will depend largely on future Fed decisions, with U.S. President Donald Trump continuing to publicly push for further interest rate cuts amid an extended and bitter trade war with China. Although I was expecting more of a pullback last week in gold into a value area before a turnaround, the near-term fundamentals for the safe-haven metal continue to be supportive. Slowing global growth statistics, along with the trade war between the U. S. and China, are still grabbing the headlines and traders should be prepared for any surprise news from China or the United States.

Meanwhile, minutes from the July 25th European Central Bank (ECB) meeting, published Thursday, showed President Mario Draghi has all but promised more stimulus as soon as September. A steady flow of dismal data since the ECB meeting in July has only reinforced the case for more support.

I expect to see the EU situation become much worse, as Draghi has imposed more than 10 years of insane interest rates that have destroyed the bond market, while wiping out pensions and also destroying the savings of the elderly. Since the global economy is becoming weaker because of negative interest rates, I fail to see how the idea of lowering rates even further will stimulate the economy.

Moreover, the Deutsche Bank (DB) stock price fell to a new low last week, sparking concerns of near-term German and European banking contagion risk. The Bundesbank said Monday that Europe's largest economy "is probably set to remain lackluster in the third quarter of 2019." Germany is facing a host of economic problems that analysts have referred to as a "perfect storm."

Although much of Asia is doing better overall with still strong but slowing growth in China and India, the rest of the continent is at, or possibly heading into recession territory. Japan, Taiwan, South Korea and Hong Kong are showing sub-par growth and Singapore reported negative first quarter growth.

The United Kingdom is possibly headed to a no-deal Brexit and if so, a hostile exit from the EU would most likely push the U.K. into a recession. In Latin America, countries including Argentina, Venezuela, Brazil, Chile, and Peru are in recession or worse. Key African economies such as South Africa are also in recession.

Traders will be looking at the Group of Seven summit this weekend for clues on what additional steps policymakers may take to boost economic growth. Now that the market has figured out global central banks are trapped by having to avoid debt deflation at all costs, this has become a perfect storm for owning precious metals. With excessive global debt levels mandating ever-declining interest rates, gold can remain overbought for longer than most investors realize. 

A continuance of the bull case may see the $1585 level reached in December Gold out of this consolidation of the $1500 region soon. On the downside, the level to watch in gold futures is $1485 on a closing basis as losing this region of support may set up a test of $1420. Although we could see an extension of this move higher, caution is still advised before considering taking new positions in the near-term with the entire gold complex priced for perfection by remaining extreme overbought.

The GDX has also continued to show signs of distribution since reaching $30 earlier this month. However, as long as the global miner ETF remains above 50 on its daily Relative Strength Index (RSI), along with remaining above its rising 18-day moving average, we could see the global miner ETF reach a blow-off move to $34 before experiencing a healthy correction. On the downside, there is strong support at the $26 level.

After speaking with various industry professionals recently, many feel the debt and equity markets may not improve in the junior space until the gold price has sustained a $1400 floor for two consecutive quarters. Many lending institutions were burned after going into the 2016 run-up in the gold complex too aggressively. Therefore, capital market entities may not become more financially aggressive until Q1 2020, as long as the gold price has sustained a $1400 floor into year-end.

I have been painstakingly researching and accumulating the best in breed small-cap growth-oriented producers, developer/explorers, and early stage micro-cap juniors for the past three years, in anticipation of the recent breakout in the precious metals complex. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access

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