Contributed Commentaries
Looking for a gold quarterly close above $1800 next week
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
After trading sideways since early April, gold appears ready to break out above multi-year resistance at $1800 on a quarterly basis next week. The safe-haven metal closed at an 8-year high on Tuesday and could make a run to test its all-time highs as early as this summer. At the tail-end of the first up-leg of the secular gold bull market that began near $250 an ounce at the turn of the century, bullion ran up to over $1900 and ended its 11-year run with a parabolic spike in August of 2011.
However, the safe-haven metal has yet to make a quarterly close above the significant $1800 level, while gold is already trading at record highs priced in all other major currencies. With the futures price consolidating in a $100 range between $1,675 and $1,775 over the past few months, the run through $1,775 resistance this week has gold knocking on the $1800 door as we head into the end of Q2 next Tuesday.
The summer months are typically a slow period for gold, but this is not a typical year to say the least. The markets are facing an abundance of potential problems, not the least of which includes the coronavirus pandemic, massive social unrest, and trade-related issues with China. When also factoring in global central banks maintaining historic expansionary monetary policies to prop up sinking economies, the perfect storm is being created for a sustained bull market in the gold complex.
Earlier this month, bond yields plunged after the FOMC meeting and weakened further after Fed Chairman Jerome Powell gave his testimony at the Senate banking committee. The world’s largest central bank is all in on debt monetization and Powell has confirmed as much during the past few weeks in his speeches and testimonies.
Furthermore, President Donald Trump announced on Monday that he is in favor of providing Americans with a second round of stimulus checks. Anticipating bipartisan support, the president declared that the next round of payments could come within weeks. Continued ultra-easy global monetary policies, coupled with the promise of more monetary stimulus, has kept real yields low and gold well bid.
Due to these factors, some banks are reportedly advising clients to hold up to 10% of their portfolio in gold, according to Reuters last week. Nine private banks spoken to by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had advised clients to increase their allocation to gold. Of them, four provided forecasts and all saw prices ending the year higher than they are now.
Meanwhile, the GDX began the week with a possible upside breakaway gap above the downtrend line from its 7-year high of $37.49 reached in mid-May. If the weekly upside gap in the GDX holds and the candle ends with a full white body later today, the sector may be cleared for take-off next week. During this two-month consolidation, the global miner ETF has thrice tested the ceiling of its mid-April breakout gap just above $31. Each test has been met with strong buying that created intra-day reversals to the upside.
After rising more than 130% in just a few short months, the GDX has been experiencing a mild consolidation of these gains while the GDXJ has continued to show relative strength. This is a reflection of small cap precious metals miners beginning to outperform the big caps, which has historically been the case shortly after the senior miners have become fully entrenched in a new bull market.
Furthermore, once the GDXJ has managed a weekly close above $50, I also expect generalist capital to come back into the tiny junior precious metals space en masse after leaving nearly a decade ago. This high-risk sector was abandoned by most retail investors after gold peaked in 2011 and they have had little reason to come back, as until recently, equities continued their historic bull run.
Although economic uncertainty persists, speculation is rampant in common stocks and being championed by a bold new breed of Millennial day-traders who are using the trading platform Robinhood for its ease of access and nonexistent commission fees. With the U.S. stock market remaining absurdly over-valued, I expect retail investors to increase their recent rotation out of common stocks and into select undervalued junior precious metals equities.
Crescat Capital’s global macro analyst Otavio ‘Tavi’ Costa told MarketWatch this week they have been taking friendly activist stakes in some “junior explorer” miners with prolific projects for this very reason. “Wait until the Robinhood traders learn about the gold and silver penny stocks, that’s where we’re long,” Costa told MarketWatch.
With the Fed continuing to inflate the money supply while investors continue to lose faith in global government and their currencies, I expect gold and particularly select precious metals juniors, to experience a sustained rally once this consolidation has ended.
My goal for the past few years has been to carefully construct a concentrated portfolio of exceptional junior resource stocks in the context of an investment time horizon at least as long as one cycle, which I feel has just begun. 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.
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