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Gold futures are attempting to build a floor at $1800

Commentaries & Views

With the gold price having closed above $1800 in Q2, the safe-haven metal is attempting to build a strong floor at this significant price point before resuming its climb to all-time highs. Former overhead resistance at $1800 was a strong multi-year ceiling and since we have not seen these gold prices in nine years, temporary consolidation around this important level is to be expected. Thus far, price dips have been bought over the past few weeks amid a sea of bullish fundamentals, as traders await the next catalyst.

Gold has been benefitting from the U.S. Dollar Cash Settle Index beginning to suffer from the massive U.S. stimulus package introduced earlier in the year. The critical support level at 96 on the index could be breached soon, with the next stimulus package possibly being introduced by next week. Senate Majority Leader Mitch McConnell (R-KY) is expected to present draft stimulus legislation next week when Congress returns from recess.

The final stimulus package could be in the $1.5 - $2.0 trillion range. A second stimulus check, or some form of direct payment, will likely be included in the next stimulus bill as members of both parties and the president support second stimulus checks. Congress breaks for summer recess on August 7, which means that the new stimulus could be finalized before the next FOMC meeting on July 29-30.

Gold is benefiting from the perfect storm of a weaker dollar, historically low interest rates, and concerns about the global economy. Investors seem to be torn between hopes of an economic recovery, inflationary pressures due to massive stimulus measures, and the worrying number of rising coronavirus cases in the U.S. Not to mention the on-going friction between the U.S. and China, which are the two largest economies.

Moreover, silver has been showing stronger percentage gains of late and is starting to attract much more investor attention, along with silver miners. The silver ETF (SIL) has risen to its highest level in three years. As with gold and its miners, it's usually a bullish sign when silver miners are rising faster than the actual commodity. The stronger silver moves in relation to the gold price could be telling us that a modest recovery in economic confidence and a big increase in inflation expectations is creeping into the marketplace.

Meanwhile, the GDX has been experiencing a mild consolidation since nearly reaching some resistance at $40 last week and becoming short-term overbought. The global miner ETF remains in a strong uptrend above its rising 18-day moving average, while the GDXJ continues to show relative strength.

The GDX has good support at the $35 level, and the GDXJ could test its 7-year breakout in the $48 - $49 region during this healthy consolidation of recent gains. After GDX broke out of a 7-year accumulative base in mid-April, the top of its breakout gap just above $31 on its daily chart was tested three times before resuming its climb to a higher high.

The most important thing for junior speculators to remember is the precious metals primary trend is higher. And the miners have broken out of multi-year bases with huge upside potential over the next 6 to 12 months, and even for the next 3 to 4 years. Since the breakout took place in the senior miners in mid-April, I noted the risk was now to the upside in the junior space.

Although it is never a bad move to take profits, it is best to consider your ultimate goal for investing in each junior purchased before selling. If your investment time horizon is weeks or months, taking some profit out of juniors which have more than doubled over the past few months may be a good idea here. But if your investment horizon is a few years, selling right now could be a big mistake.

Now that the GDXJ has broken out of a huge 7-year base, the most money is made by buying and holding for long-term gains, while the measured technical target is $90. For those of you who are still accumulating positions, it is best to focus on individual companies to time your buys and sells using technical support zones and uptrend lines, as opposed to waiting for the sector to correct further.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.