Gold is consolidating recent gains before tackling $1800
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After reaching a high of $1788 in early April, the gold price has been consolidating recent gains while attempting to build a new floor above $1675 per ounce. Although the safe-haven metal will likely close the month above $1700 later today, gold futures have been trading within a $100 range between $1675 and $1775 for the past eight weeks.
Gold may be in the process of building a strong accumulative base in this range preparing to break out into all-time highs in U.S. dollars, as it has already done so when priced in every other major currency. The $1800 level is strong resistance going back to 2012, and a consolidation process just below this region is not surprising.
While the safe-haven bid in gold has been less convincing as “risk on” has been coming into the marketplace, silver has been able to play catch-up as its industrial component cheers the reopening of developed nations recovering from the COVID-19 lock-downs.
Additionally, silver has begun to lead bullion consistently since the Gold/Silver ratio spiked over 120-1 in mid-March. The recent strength has been due to the combination of rising industrial demand and soaring global money supply, which has quickly moved this closely watched index below 100-1. This bodes well for silver to continue leading gold with the metal’s fundamentals improving and industrial demand beginning to recover.
The rapidly expanding money and government bond supply is an ideal backdrop for rising inflation and has finally gotten long suffering silver bulls excited again. Silver has historically lagged the gold price once a new precious metals bull market has been established. But the grey metal eventually out-performs gold on a percentage basis, as more retail investment comes into this tiny sector during full-fledged precious metals bull markets.
Meanwhile, investors are faced with uncertainty like we have never seen before and global central banks continue to inject huge amounts of money into their respective economies in order to prevent complete collapse. All this economic uncertainty has been bullish for gold prices, as SPDR Gold Trust holdings (GLD) hit a seven-year high on Wednesday.
Also, on Wednesday, both the European Union (EU) and Japan went big on new economic stimulus measures in response to the coronavirus crisis, giving both gold and equities a boost. The European Commission recovery fund, dubbed "Next Generation EU", includes €500 billion in grants and €250 billion in loans for member states, with the money borrowed on financial markets and repaid from the bloc's budget. European Commission President Ursula von der Leyen has called the pandemic an unprecedented crisis and hopes the package shown will satisfy all member states.
Over in Japan, the cabinet approved Prime Minister Shinzo Abe's plan for stimulus spending of $1.1 trillion on Wednesday and parliament is expected to pass it before June 17th. The package will include money for businesses, health care assistance and local governments. This new plan and previous coronavirus measures are worth $2.18 trillion or 40% of the country's GDP.
Furthermore, the Federal Reserve has printed more money in the past few months than in the last 100 years of its existence. Earlier this year, the world’s largest central bank lowered its federal funds target rate back to a record-tying low of 0% to 0.25% to encourage lending. The Fed also promised an unlimited amount of quantitative easing in an effort to assuage market fears.
Over the last two weeks of March alone, the Federal Reserve bought more than $1 million in assets per second. The central bank’s balance sheet currently sits at nearly $7 trillion, and is projected to expand extensively in the coming year.
The U.S. central bank, who has recently been deemed “a lender of last resort” by the Federal Reserve Bank of Dallas president Robert Kaplan, has also set up swap facilities around the world to shore up global supply. Analysts at Bank of America say that these two actions could increase the Fed’s balance sheet to $9 trillion by the end of 2020, which is approximately 40% of U.S. GDP.
Additionally, for an economy that is over 70% dependent on the consumer, having a total of 40.77 million Americans file initial jobless claims since the week of March 21st will undoubtedly keep the Fed’s historic commitment to unlimited quantitative easing for the foreseeable future. This means that normalizing interest rates is not something that is going to happen anytime soon and lower interest rates gives gold a stronger appeal to investors as an asset.
Combined with currency debasement keeping gold well bid, we are also seeing tensions increase between the U.S. and China. President Donald Trump is expected to hold a news conference on China later today as his administration moves to pressure Beijing over its treatment of Hong Kong. The U.S. government is reportedly considering imposing sanctions on Chinese firms and officials over China’s new national security laws for Hong Kong, along with President Trump blaming Beijing for “mass Worldwide killing” over the coronavirus pandemic.
These are unprecedented times and precious metals will continue to benefit from global central banks seemingly endless drive down Currency Debasement road while global bond yields continue to plunge, therefore, making gold more appealing. And the safe-haven bid in the metal contributes to investors continued loss of faith in global central bank monetary policies.
There are trillions of dollars in negative-yielding bonds worldwide, with plenty of other positive-yielding bonds liable to produce real-money losses once inflation is factored in. With investors having fewer opportunities to generate guaranteed real income in this increasingly dangerous environment, gold is suddenly being viewed as the logical store of value for the foreseeable future.
With the mining sector in the process of a healthy consolidation of recent gains into month-end book squaring, this is a good time to add to existing positions in gold stocks. The GDX recently back-tested a resistance area at $37.50 and is in the process of possibly testing its 7-year breakout region of $30-$32 before resuming its climb to the technically measured breakout target of $50.
But the GDXJ has yet to breakout above multi-year resistance at $49, even though many juniors have already made new multi-year highs and new money has come into the sector via large bought-deal financings. In my 18 years of investing in the precious metals sector, junior gold stocks have never been more compelling than they are right now.
If you require assistance is choosing the best juniors to accumulate for the long-term, stop by my website at www.juniorminerjunky.com and sign up for my free email list. You will receive this column in your inbox each week, along with current interviews. Although the 250-membership cap has been reached in the JMJ subscription service, place your name and email address on the waiting list if you are interested in becoming a member and you will be contacted once spaces open up.