Gold Holding Above $1550 into Central Bank Confab’s Next Week
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
(Kitco News) - Despite missile strikes, oil market turmoil, along with ongoing impeachment proceedings, major U.S. stock market indices continue to make all-time highs as waves of liquidity continue to wash traders cares away. After what amounted to mere half-day sell-offs of profit taking, it seems nothing can get in the way of the bull market that is carrying all risk assets higher into the new year.
However, by most readings, bullishness on Wall Street is at levels that have not been seen in over 15 years, along with a major bearish divergence now in the Volatility (VIX) Index, which is not making lower lows to confirm higher price highs. These are signals that some sort of stock market correction seems highly likely, and soon. Whether its substantial or just another blip on the way to a parabolic conclusion down the road remains to be seen.
The efforts of the Federal Reserve to inject extra liquidity into the banking system via the Repo Market over the past 2 months have helped to fuel this rally, which has also benefitted the gold complex. The world’s largest central bank has not only injected nearly $300 billion since September, but also noted recently that it “may keep adding temporary money to markets for longer than policy makers had expected,” at least through April.
These additional cash injections by the Fed have been instrumental in keeping gold above what was formerly long-term resistance at $1550 going back to early 2013, when the safe-haven metal began a historic decline. The huge boosts of liquidity also suggest that the financial market is less liquid and healthy than it might seem at first sight.
In this column last week, I mentioned hints of the repo market situation becoming an international crisis, when Richmond Fed President Thomas Barkin said that in addition to a standing repo facility, long-term fixes providing more liquidity could include adjusting regulations and setting restrictions on other programs, such as the foreign repo pool. It appears as though the shortage of liquidity in the U.S. Repo Market is not a one-off event and has become a structural problem.
Beginning next week, the four largest global central banks will be conducting their first meeting of the year and the under-reported Repo Market crisis may be foremost on their agenda. First up is the PBoC in China and the Bank of Japan on January 20th, followed by the ECB on the 23rd.
The Federal Reserve will meet on January 29th and with U.S. equities continuing to make all-time highs, the central bank may once again turn to its domestic policy objectives while they have already ceased to assist Europe with further interest rate cuts. The eurozone is trapped into a seemingly endless negative interest rate monetary policy, which has destroyed its bond market.
Up until recently, the Fed was appeasing international central bankers who have been locked into negative interest rates, by implementing three incremental quarter point cuts of the Fed Funds Rate. But Kansas City Federal Reserve President Esther George stated earlier this week the central bank may need to “reverse” these three cuts implemented in 2019 that brought rates down to 1.5% to 1.75%.
“We will need to assess whether the 2019 rate cuts prove to be ‘insurance cuts’ that will need to be reversed if headwinds fade,” George said, in a speech to the Central Exchange, a business leadership development group in Kansas City. The main reason for the Reserve President to make this statement is the Fed being compelled to provide vast amounts of liquidity in the Repo Market, as the free market pressures the central bank to raise rates.
In December, Sweden’s central bank ended five years of negative interest rates when it raised benchmark borrowing costs by a quarter point to zero, defying an economic slowdown and global uncertainty. The increase from minus 0.25 percent makes the Riksbank the first of the central banks that pushed rates below zero to inch its way back to what was long considered the floor for interest rates.
Sweden is now proving a test case for central banks that have attempted to stimulate their economies with negative interest rates. Rates are still negative in the eurozone, Japan, Denmark, Switzerland and Hungary. With the exception of Hungary, interest rates are expected to remain negative for some time to come.
Meanwhile, the GDX is in the process of forming a 5-month handle of a nearly four-year cup & handle formation, which is considered a technically bullish continuation pattern used by traders to identify buying opportunities. Unless the global miner ETF has a monthly close below $26, this pattern will remain in play and if broken to the upside, there is not much technical resistance until the $40 region.
With conference week kicking off today in Vancouver, beginning with the Metals Investor Forum (MIF) on January 17th & 18th, followed by the Vancouver Resource Investor Conference (VRIC) on the 19th & 20th, and concluding with the AME Roundup on January 20th-23rd, these events present an opportunity to meet and greet the management of numerous junior resource companies.
If you are unable to attend and would like some assistance in researching and choosing quality juniors to invest in, stop by my website and check out the subscription service at https://juniorminerjunky.com/. The JMJ real money portfolio gained 35% in 2019, while being up 160% since its inception in 2016.