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Dovish fed boosts gold but miners remain weak

Commentaries & Views

On Wednesday, the Federal Reserve voted to maintain the benchmark interest rate between 1.5% to 1.75% for the second consecutive meeting. The central bank repeated its prior view that the U.S. is growing at a “moderate rate” and also noted that inflation remains below their 2% target, along with allowing inflation to exceed the 2% level if need be. “We wanted to underscore our commitment to 2% not being a ceiling, to inflation running symmetrically around 2% and we’re not satisfied with inflation running below 2%,” Federal Reserve Chairman Jerome Powell stated.

The world’s largest central bank also mentioned they will continue to monitor the Chinese coronavirus as it unfolds, while its spread is causing concerns regarding global economic growth. This new coronavirus, which started in the city of Wuhan, has so far left over 200 people dead, infected more than 9,800 and spread to at least 18 other countries. Although the coronavirus, dubbed 2019-nCoV, has been declared by the World Health Organization to be an international public health emergency on Thursday, the good news is the death rate remains at less than 3%.

Gold has maintained its uptrend this year as the outbreak of the virus threatens to harm the world economy, prompting volatile equity trading amid swings in investing sentiment. The traditional safe-haven metal has also remained in favor as the Federal Reserve has signaled interest rates are likely to remain low for some time again this week, while the central bank boosts its balance sheet to relieve strain in money markets.

The Fed has continued to open up its balance sheet even more to over half-atrillion dollars’ worth of liquidity into the markets through Repo operations. When U.S. banks withdrew from lending into the Repo Market in late Q3 last year, the central bank was compelled to inject cash and thereby lending into the Repo market to prevent the short-term interest rate from rising as it did to 10% on September 17th, 2019. This continued loose monetary approach by the Fed should keep real U.S. rates negative this year, which cuts the opportunity cost of holding bullion.

Meanwhile, The Bank of England decided to keep interest rates unchanged at 0.75% yesterday, however, they warned PM Boris Johnson that his Brexit plan could push the economy down. The members voted 7-2 for keeping the rates unchanged and Brexit will officially take place at 11 PM UK time today.

The combination of a “risk-off” environment, coupled with the continuation of collectively loose global central bank monetary policies, has created a perfect storm for the safe-haven metal. A 7-year high monthly close above $1570 in gold futures later today would put strong upward pressure on bullion with a target towards the $1650 region in February.

Although the gold price has reacted to these on-going events with a continuation of its breakout from a 6-year base last summer, the miners remain un-convinced this move higher in bullion will be sustainable. The GDX has remained in consolidation well below its 2016 monthly high at the $31 region, while trading with weak volume along with most juniors failing to catch many bids.

Moreover, the gold/silver ratio touched 90 again this week as silver’s industrial component has been sold down with copper on fears of the coronavirus outbreak impacting global growth. Ultimately, the market should continue to find buyers of silver on dips, as there are a lot of concerns out there when it comes to the global growth situation and we saw a strong bounce from the metal’s 50-day moving average yesterday.

However, the continued relative weakness in the miners, while gold remains well bid, is cause for concern among precious metals stock investors. Gold market watchers tend to focus heavily on risk-on, risk-off sentiment swings along with subsequent flows into, or out of, the GDX and GDXJ gold miner ETF’s for clues regarding near-term trends.

Since miners’ earnings amplify gold price changes, the major and mid-tier gold equities dominating both the GDX and GDXJ generally leverage gold by 2x to 3x. But during the first month of trade this year, the GDX/GLD ratio turned sharply lower after rising into the end of 2019 as fund managers and big money traders began taking gold stock profits immediately after returning from their respective winter holidays.

Gold stock ETF corrections after major up-leg’s have historically sold back down to their 200-day moving averages, which removes excessively bullish sentiment at previous highs. But this key technical line of major support has yet to be tested in either ETF during the current consolidation that began in September.

The GDX 200-day moving average lies just above strong support at the $26 level, while the GDXJ may need to test the $37 region to visit this important technical line of support before continuing higher. Although the long-term remains bullish for this new precious metal’s equity bull, the sector may continue to consolidate into February. Until we see both the miners and silver begin to outperform gold on a consistent basis, remain focused on the big picture as the macro-fundamentals are firmly in place for gold to continue trending higher in 2020.

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