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GDX and silver relative weakness hinting gold may need a rest

Commentaries & Views

Although the rapid spread, along with the equally rapid international response, to the coronavirus from its epicenter in China has left markets on edge, weakness continues to be bought in equities. The price of gold has also responded to the upside and remains well bid above multi-year support at the $1550 level.

However, with the global developments so far this year sending safe-haven capital into gold, traders have been mostly ignoring the miners. The GDX/GLD ratio began to trend lower as the new year began and the silver price peaked below $19 a few days later. Historically, both the miners and silver lagging an extended move in bullion has meant a pull-back is to be expected soon.

Gold prices have spent the last two weeks consolidating in the mid-$1500’s following the early January spike on the U.S.-Iran military skirmishes, while the miners have moved lower. Any signs that the coronavirus is contained could serve as a near-term headwind for gold, though the medium-term uptrend remains intact as long as the yellow metal can hold above $1535.

Bullion edged higher but continued to move sideways on Thursday, while in the process of forming a nearly 7-year cup & handle continuation pattern. Although this is generally a very bullish technical situation, both the miners and silver are not confirming this pattern may result in an upside breakout.

Moreover, it remains a cause for concern for the gold price to see the latest Commitments of Traders (CoT) report continuing to show extremely high Commercial Short and Large Speculator long positions. With the Gold Hedgers positioning at its most extreme bullish position in history, the futures market is warning of moderation taking place before we see significant further gains.

Meanwhile, the European Central Bank (ECB) expectedly kept its ultra-loose monetary policy unchanged on Thursday. In addition to keeping rates unchanged, the ECB will examine whether it should alter its €200-billion corporate bond holdings to take account of climate change. The newly appointed head of the central bank Christine Lagarde, promised she would launch its first strategic review in 16 years.

With the Federal Reserve being the last and largest central bank to hold its first policy meeting of the year next week, the continued rise in equities could force the Fed to once again turn to its domestic policy objectives. U.S. policy makers have already ceased to assist Europe with further interest rate cuts and as mentioned last week in this column, Kansas City Federal Reserve President Esther George stated the central bank may need to “reverse” the three cuts implemented in 2019 that brought rates down to 1.5% to 1.75%.

The U.S. Dollar Cash Settle Index has been rising in the last few sessions following its December decline, which has put the greenback at a crucial technical juncture heading into Fed week. A rising world’s reserve currency would have negative effects on commodities, gold and the relative performance of international equities to the U.S., whereas a falling dollar would represent a bullish factor for gold and commodities.

With the CME FedWatch Tool pricing in an underwhelming 13% chance of a rate hike, the central bank is widely expected to keep rates on hold, however, computer-based algorithm trades will be set to sell gold if the Fed becomes the slightest bit hawkish on future monetary policy moves. This could very well be the reasoning for the miners lagging gold’s move higher into the FOMC meeting speech by Fed Chair Jerome Powell next Wednesday. Therefore, caution is advised in the precious metals complex until the market has digested the remarks by Mr. Powell on January 29th.

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