Gold flash crash retests its former all-time high
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Since my last column two weeks ago, gold for immediate delivery hit a high of $2,089 per troy ounce with silver peaking just below $30.00. Last Friday, the safe-haven metal hit a daily RSI above 90, then closed the week with an outside reversal to the downside, warning that a further decline this week was probable. This suggested that building gold positions at the levels beginning this week would have proved much too risky.
Beginning overseas before the Comex session began on Tuesday, the gold price nosedived into the following overseas trading session and hit $1862 during a flash crash stop run, before stabilizing to close above its former all-time high of $1923 at Wednesday’s Comex close.
The precious metals’ collapse this week was precipitated by a stabilization in the U.S. dollar. While Democrats and Republicans were still debating a second coronavirus package after reaching an impasse and missing the deadline at the end of last week, the steep rise in U.S. Treasury yields was the main catalyst for the decline.
The U.S. stimulus stalemate has continued this week. President Donald Trump accused Democrats of not wanting to negotiate on Wednesday, while Democrats and Republicans blamed each other for the five-day break in talks. Democrats have backed a $3.5 trillion package, with Republicans eyeing a package in the region of $1 trillion and this exposes the gap in across-the-aisle U.S. party politics.
With the U.S. dollar in the process of a relief bounce, this was more reason for some profit taking to occur in the gold complex. Although the Federal Reserve has previously mentioned the possibility of instituting yield curve control, Treasury yields may continue to gradually rise and put more pressure on the gold price until they are forced to do so.
When considering gold had traded 15 consecutive sessions in technically extreme overbought territory, Tuesday’s violent correction, which saw gold give back over $200 from its peak, should not have been too surprising. Although a sharp drop in the safe-haven metal of a magnitude not seen since 2013 on a daily basis felt perilous to those chasing prices, this stop run should be considered a healthy correction when viewed from a longer-term perspective.
Once the all-time high above $1900 was taken out last month, gold prices went up very quickly without a proper price pullback. It is important to consider that larger upside price moves, which have been stretched too high above closely watched moving averages, tend to see bigger downside corrections to test these lines of support once they finally arrive.
Moreover, price corrections in up-trends are necessary for the continued healthy extension of the current up-trends in both gold and silver. It is also important to consider that this big downside price correction did not violate nor negate the price up-trends on the charts. In fact, this sharp correction successfully retested gold’s former all-time high in overseas trade, then closed the following Comex session safely above the $1920 region.
The U.S. deficit rose to $2.81 trillion for the first ten months of the year, the Treasury Department reported this week. Federal government spending reached $63 billion in July alone, which was a small sum compared to the amount paid out during the worst of the coronavirus pandemic.
Over the past few days, this news has the sharp sell-off cooling down and beginning to consolidate on some dip buying. Together with the rising inflation expectations amid massive monetary and fiscal stimulus remaining supportive of gold in the medium to long term, December Gold has managed to close on its rising 18-day moving average for the past three consecutive Comex sessions.
After sinking along with the gold price, silver has begun to lead gold higher during this consolidation, closing well above its 18-day moving average yesterday. Fortunately, we will be able to see both the gold and silver Commitments of Traders (CoT) report changes this week, as this massive correction took place on the very last day of the reporting period that will show up in the data released later today.
Technically, we could see the $1800 region in gold futures tested before resuming its uphill climb, as this level was long-term resistance before being closed above on a quarterly basis for the first time ever in June. Although gold ran up to over $1920 during a parabolic blow-off move in 2011, the safe haven metal was unable to close above $1800 on a monthly basis until this year.
Meanwhile, both the GDX and GDXJ were telegraphing this move lower, and both miner ETF’s peaked the week before the flash crash took place on Tuesday. During this healthy consolidation of recent gains, both have lost support at their respective 18-day moving averages, which may act as resistance along with their newly created downtrend lines from last week’s high’s. Look for support at their respective 50-day moving averages if December Gold decides to test the former all-time high on the Comex next week.
However, most juniors have not corrected much during this recent weakness in the mining complex, and the higher risk silver juniors continue to show relative strength. The silver miner ETF’s (SIL & SILJ) have both returned to their respective 18-day moving averages, as silver has begun to out-perform gold again.
I recommend focusing on individual companies to time your buys and sells, as opposed to concentrating on when this sector correction may bottom. We have now entered into a buy and hold bull market in the mining sector for the first time in nearly a decade, and maintaining core positions during corrections is strongly recommended.
The gold bull will do everything in its power to shake off as many riders as possible. Trimming profits during over-extended moves along the way, while maintaining core positions, will assist investors in remaining fully invested during sharp corrections.
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.