Risk-on sentiment forces gold below late September lows
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
With recent news reports of the U.S. and China edging closer to a “Phase One” trade deal, risk-on sentiment enveloped the global equity markets this week that forced December Gold to break strong support at $1480. The safe-haven metal came under significant technical selling pressure beginning on Tuesday, when it suddenly went from a bullish bias over the past few weeks, to a short-term bearish one in the space of just a few hours’ time.
On Thursday, the Chinese commerce ministry said that China and the United States have agreed to cancel in phases the tariffs imposed during their months-long trade war. Gold futures quickly sliced through major support, triggering sell stops below the late September low at $1465 after China’s early morning announcement sent U.S. indexes soaring during early trading. Although the White House has not made an official statement to honor or deny China’s claims, all three major U.S. indexes closed at record highs yesterday.
Even though the U.S. economy had been softer going into Q4, it was not poised for the major recession that many analysts had been forecasting because of the China trade dispute. In fact, the U.S. market continues to hold up the entire world economy, while short covering from hedge funds expecting an “October crash” has assisted in the major U.S. indexes making fresh all-time highs this week.
Recently, the liquidity crisis has been fleeing the bond markets and sending more and more capital into U.S. equities. A falling U.S. dollar since early October did not help the gold price much and now rising longer yields, along with a dollar bounce, is forcing the safe-haven metal lower. Bond yields are rising, but the good news is the yield curve is steepening with long rates rising much faster than short-term rates.
For most of 2019, global investors have at various times been parking safe-haven capital into either U.S. blue chip stocks that pay a healthy dividend, the U.S. dollar, and up until recently, gold. Therefore, investors who have been expecting a stock market “crash” are having to re-think their investment strategy going forward.
Another reason gold may be headed for its biggest weekly loss in three years has been the recent softening in the tone toward aggressive rate cuts by major central banks. Last week, the Federal Reserve cut rates as expected, but then after three rate cuts policy makers are signaling a pause. The Bank of Japan followed shortly thereafter by holding policy steady.
On Tuesday, the Reserve Bank of Australia left its benchmark interest rate unchanged, while signaling no further cuts. Then on Thursday, the Bank of England held interest rates steady ahead of next month’s snap Brexit election. Since holding gold doesn’t pay interest or a dividend, lower interest rates tend to make it a more desirable asset.
Moreover, silver has begun to lead the yellow metal lower this week and may be headed for a test of its 50-month moving average at $16.45. The metric was a very strong line of resistance since the metal broke down in early 2013 and was finally broken to the upside in July, so we may be seeing it tested soon.
When coupled with a sharp rise in U.S. Treasury yields, along with major central banks no longer cutting interest rates, a trip down to the July breakout region in gold at $1375-$1400 heading before year-end may also take place soon. More generalist investors, who piled into bullion funds like GLD after the summer breakout, may need to be shaken out before the bull resumes and this week’s breakdown may accelerate that process.
Meanwhile, the GDX has held up above strong support at $26 thus far, buoyed by better than expected earnings releases from a few global miners who have also announced substantial increases to their respective dividend policies. Earlier this week, sector stalwart Barrick Gold (NYSE:GOLD) announced a 25% increase on the previous quarter’s dividend, while heavyweight Kirkland Lake Gold (NYSE:KL) announced a 50% dividend increase.
Although we have yet to see a panic volume spike in the global miner ETF, the critical $26 region must hold on a closing basis to prevent a possible capitulation move down to the $23-$24 area. There is a daily gap just above this level, which may need to fill before the GDX can make a sustainable bottom. A sell-off down to this region would also shake out most of the weak handed generalist late-comers to the mining sector, while presenting an excellent buying opportunity for those who missed out on the summer rally.
Furthermore, with tax-loss season heating up into year-end, many of the juniors who have failed to catch many bids during the previous breakout in the gold complex, may be susceptible to more selling. I strongly advise long-term speculators maintain a watch-list, with carefully researched price points, to take advantage of seasonal discounts in the best in breed juniors.
If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at https://juniorminerjunky.com/subscribe. Although the JMJ service has reached capacity of 250 members, there is a waiting list if you are interested in becoming a member.