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Gold remains above $1500 after Fed's 'hawkish rate cut'

Commentaries & Views

With most precious metal sector analysts, including myself, expecting December Gold to lose the $1480-$1500 region of support during this current correction, the safe-haven metal has thus far refused to break down below this key level. In recent months, gold has held above $1,500 as economic and global uncertainty continues and the China trade war drags on.

Although the Federal Reserve delivered a widely expected interest rate cut on Wednesday, Fed Chair Jerome Powell left traders uncertain on the outlook for further monetary easing. The meeting’s outcome came away with a 7-3 vote to cut rates and was the most divided Fed since 1986. Median Fed policymaker projection is for no further cuts in 2019 but 7 of 17 policymakers saw one more cut as appropriate.

Gold was hit with algorithm-based selling as the market deemed the result a “hawkish cut” but the metal was able to maintain the $1500 level after the press conference, which followed the FOMC statement. Since a data-dependent Fed was not committing to further rate cuts, markets will now be looking closely to progress with US/China trade talks over the next few weeks.

President Donald Trump blasted the Federal Reserve Chair Jerome Powell as a "terrible communicator," after the U.S. central bank's rate cut was less generous than what POTUS wanted. "Jay Powell and the Federal Reserve Fail Again," the president tweeted after the Fed reduced its federal funds rate by 0.25bpts. "No 'guts,' no sense, no vision!"

The president has wanted the federal funds rate to be near-zero, rather than the range of 1.75% to 2% set by the Fed this week. Trump had previously remarked that other countries, such as Germany, have an advantage because their interest rates are negative, even though negative rates are a sign that those economies are in a recession and may struggle to grow in the longer term.

Moreover, signs that stress in U.S. funding markets is rebuilding ramped up pressure on the Fed to permanently increase reserves by boosting Treasury holdings, due to the Repo Rate reaching a high of 10% by 9am EST and just before the stock market opened yesterday. Overnight financing (Repo Rate) is a basic function which holds the economy together and those who trade on leverage rely on the REPO market.

The Fed has lost control of short-term rates, so Trump tweeting about wanting zero to negative rates may fall on deaf ears, as the free markets are showing something else is on the horizon. The events in Repo Rates during the past few days is another warning sign that central banks are trapped. In Europe, they have destroyed their bond market with more than $15 trillion and perhaps up to $17 trillion in negative-yielding bonds.

In the short-term, however, unless there is significant risk aversion around a trade war escalation moving into Q4, gold may head back to $1460-70 area as the market takes more profit after a very successful run in bullion since late May. Sellers have been showing up at the $1510 region recently, suggesting it may be difficult for gold to make headway in this current environment without a strong catalyst.

Meanwhile, the GDX, which had been leading gold lower during the recent selloff, made a higher low last week, but will need to get back above its 50-day moving average near $28.25 for an indication of this recent bounce to continue next week. The global miner ETF has some support at the $26 level, but I would expect the $24-$25 region to be tested if the $1455 level is eventually breached on a closing basis during this healthy correction in gold futures.

Keeping focused on the big picture and maintaining core positions in the gold complex is highly recommended during this correction process in the safe-haven metal.

Takeaways from last week’s Beaver Creek Summit: Although the conference was upbeat and mostly positive, there was not much exuberance as capital markets remain tight for many of the micro-cap juniors seeking financing. Advanced Explorers, who control high-margin projects in safe jurisdictions that have been able to raise capital with attractive terms, remain optimistic.

A few of the juniors I met with feel they have identified highly prospective targets that will gain them access to capital markets. I also met with juniors who control more advanced projects and are confident they will be able to raise more capital, once they need to come to market again later this year.

Cashed up single asset developers who have used a base case of $1350 gold for their projects, or lower, continue to advance toward production and the reality of a higher gold price provides some cushion as they move towards bringing these assets online. While optionality developers at the finance stage, who control large projects that require $1400 gold or higher, have begun to actively seek partners.

There were a few industry attendees informing me that investment banks are searching for the next possible SilverCrest Metals (SILV) in waiting. There are very few silver juniors with the potential to reach the exploration/development success of this company, whose stock has gone from less than C$0.10 to over C$6 since early 2016 in a depressed silver environment. I have been advising both my readers and subscribers over the past few years to accumulate a basket of silver juniors on weakness for a long-term holding position.

At some point in the near-future, we will see the juniors begin to outperform the GDX in a big way once speculative fever hits the entire precious metals complex. Over the past few years, I have positioned Junior Miner Junky subscribers in the best in breed precious metal juniors well ahead of this latest surge higher in both gold and silver. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.