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Green shoots in the gold complex

Commentaries & Views

As expected in this column two weeks ago, the healthy pullback in the gold complex has continued after the safe-haven metal reached a key zone of long-term resistance at the $1550 region seven weeks ago. This price level is very significant, due to being critical support dating back to the previous gold bull run which ended in late 2011.

At the time prices first began to encounter this resistance in August, the metal was extreme overbought, rivaling technical levels last seen on the weekly chart in 2011 when Gold prices topped-out above the $1900 region. When the all-time high in bullion was reached at $1925, the $1550 area was tested multiple times and once broken in March 2013, the entire precious metals complex collapsed into a brutal bear market. What was once critical support, has become strong resistance after gold broke out of it’s nearly six-year base above $1375 in June.

During this recent pullback, the metal has been consolidating in a $100 range between $1465-$1565, after being unable to close above $1550 on a weekly basis. Although the $1475-$1480 level has helped to hold support since then, the bulls have yet to make a lasting mark as that support inflection has merely led to another lower-high.

However, the bullish backdrop remains and while this healthy retracement/pullback is now working on its third month, that pullback has still been relatively shallow in the bigger picture. Moreover, there are signs being given by the miners that we may be reaching an end to this correction sooner than previously anticipated by most sector analysts, myself included.

Although the gold price has continued to trade with a downward bias, there are signs of a significant bottom possibly being formed in the miners if the GDX can close above $28.50 on this bounce. With its advance decline line showing positive divergence, the global miner ETF is in the process of bouncing off strong support at the $26 region since mid-week and the GDX/GLD ratio is bouncing from its 200-day moving average. Once we see the miners begin to outperform gold on a consistent basis, the odds favor the $1550 level in gold being tested again sooner, rather than later.

Furthermore, silver stocks have seen relative strength beginning to take place on Wednesday as well, along with silver juniors leading the price action. The PureFunds Junior Silver Index (SILJ) is bouncing from its rising 200-day moving average and if these higher-risk, small-cap stocks begin to lead the entire precious metals complex in earnest, the odds will increase of a significant bottom being formed.

There are more than a few catalysts for this sudden strength in the gold complex this week besides the recent weakness in the U.S. dollar. The world’s reserve currency has remained weak following the release of disappointing U.S. retail sales on Wednesday, which raised concerns over the world’s largest economy and supported expectations that the Fed will cut interest rates at its next meeting. As we head into the next FOMC meeting at the end of this month, the latest estimates from the CME FedWatch Tool has priced in an 83% chance of another 0.25bpt rate cut, up from 67% last week.

The U.S. and China have different understandings regarding phase 1 of the trade deal, as U.S. President Trump was proud to suggest that China will be purchasing US$50 billion worth of agricultural products. Yet the Chinese Commerce Ministry did not mention a figure, but stated they will purchase according to the Chinese market demands. With no top-level meetings in sight, investors pondered how much longer the ugly trade spat will continue.

Meanwhile, President Trump faces a battle with his own party over Syria, a relentless impeachment fight and the steady loss of independent voters in swing states. Tuesday night’s Democratic debate heated up as the 12 candidates faced off in Ohio. Notably absent were any questions pertaining to China and the only topic all candidates could agree upon was to impeach President Trump.

Although the gold rise was muted on Thursday due to the European Union and U.K. reaching a preliminary Brexit deal, UK PM Boris Johnson still has to persuade parliament and the DUP in Northern Ireland to agree to the terms. Worries that a deal may not pass a weekend vote in the British parliament provided support for the safe-haven metal, along with equities showing signs of weakness.

But the biggest driver for December Gold continuing to hold near the $1500 level has been the ongoing destruction of global currencies by their respective central banks. Since the Federal Reserve has joined its global central bank brethren in adopting a much looser monetary policy earlier this year, lowering interest rates in the world’s reserve currency has been the impetus for gold breaking out of its multi-year basing pattern and reaching the aforementioned resistance level.

Moreover, for several weeks now, the Fed has had to accommodate near total chaos in the U.S. Government bond repo market. Banks refused to lend as repo rates trended as high as 10% earlier this month and the U.S. central bank was forced to inject billions of dollars into the financial system to address the squeeze. Since October 4th, the world’s largest central bank has pumped $200 billion in cash into the market, with a promise to do more for months to come, unless there’s a financial crisis.

Nevertheless, gold and its miners had not reacted much to this action until Wednesday, when the Fed began its outright T-bill purchases with a buy of $7.5 billion. The fact that the Fed has had to pump $200 billion in cash into the banking system in less than a month, while promising to add another $480 billion or more in outright purchases of Treasury securities over the next 6 months, has not been lost on gold investors.

As mentioned previously in this column, while an eventual return to the breakout region just below $1400 cannot be ruled out, I think given this week’s price action when gold formed a bullish-looking candle on its daily time frame, along with the fact that the metal was able to rebound quickly after initially spiking lower on the Brexit news, goes to show investors are still interested in the safe-haven metal despite the ongoing risk rally.

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