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Gold stop-run below $1920 extends miner consolidation

Commentaries & Views

Unprecedented global stimulus measures, negative real rates, and a weakening dollar pushed gold futures to a record high of $2,089 per ounce in early August. After printing a quarterly basis close above $1800 for the first time in its history in Q2 2020, the safe-haven metal blew past the former all-time high of $1920 seen back in 2011.

With congress arguing over the terms of the next stimulus package, coupled with a strong bounce in the U.S. dollar, weak-handed long liquidation is being featured this week in global equities, along with the gold complex. Earlier this week, December Gold broke down from an 8-week consolidation pattern below the former all-time high at $1920, then we quickly experienced a stop-run down to the $1850 level into Wednesday night in overseas trade.

A big impact on the gold price has been linked to further delays in the highly anticipated stimulus package, while the Republican-led Senate appears to be concentrating on pushing through a replacement for Justice Ruth Bader Ginsburg, who passed away last Friday. Investors sitting on huge precious metal sector gains grew nervous regarding a new stimulus deal becoming less likely before the election, so profit taking ensued and the stop-run moved down to the next support level.

During the first phase of a secular gold bull market that began at the turn of the century near $250, a key futures contract traded at roughly $2000 by 2011, which has become a very significant round number. After becoming extreme overbought during this newsworthy event of breaching $2000 per ounce, the gold price is now recoiling from that same $2000 price zone.

Gold tends to react violently at round numbers like $500, $1000, and $2000. Just before the Global Financial Crisis (GFC) took place in late 2008, the $1000 level was breached on a daily closing basis, then quickly reversed course before the crisis began. After moving swiftly down below $700, the safe-haven metal then took another year before finally blowing through the $1000 level once the Fed re-capitalized U.S. banks with the printing press. 

Since the gold price made a “V” shaped bottom in March, like the bottom made during the GFC in 2008, the Fed has colluded with all major central banks to flood the marketplace with “whatever it takes” to get the global economy back on its feet in response to the Covid-19 pandemic.

The tidal wave of liquidity thus far in 2020, from the Fed and global central banks via low interest rates and quantitative easing, is unprecedented. Governments have provided fiscal stimulus packages at record levels. During the period from June through September 2008, the U.S. Treasury borrowed a record $530 billion to fund stimulus. By comparison, during just the month of May 2020, the Treasury borrowed $3 trillion.

Central bank and government policies are increasing the fiat money supply at an unprecedented rate. Since policy makers are beginning to realize this nearly half a century Keynesian experiment is in the process of unravelling, global central banks may attempt a move to issuing perpetual bonds, which only pay interest and they will not be obligated to redeem them. Needless to say, stimulus and global central bank policies increasing the money supply and deficits at a record pace has significant ramifications for future inflation, which is a big positive for the gold price. 

Furthermore, we are just 40 days away from a U.S. election result that may very well not be decided until December. President Donald Trump has made it very clear he feels the election is “rigged” due to a faulty mail-in voting process benefitting Democrats. He also believes the outcome will be decided in the Supreme Court if he loses the election.

The acknowledgement expressed by the Fed to now tolerate inflation rising to 2.25%-2.50% for an extended period, along with the circumstances surrounding what is shaping up to be the most vehemently protested election since the 1960’s, is very gold friendly in the medium to long term.

Nevertheless, technically, the short-term implications for the gold complex are a bit cloudier. December Gold will need to hold the $1865 level on a Comex closing basis this week or we could see the much stronger $1750-$1800 region come into play. Gold futures basis $1800 has technically become a critical support level, being an area where we have seen plenty of resistance going back to the 2008 gold bull. 

The 200-day moving average in December Gold is starting to reach towards the $1750 level as well, so that might tie in quite nicely for a more sustainable bounce along with increasing interest by the longer-term “buy-and-hold” investor.

Meanwhile, the strong support regions of $36-$37 in the GDX, along with the $51-$52 area in the GDXJ, saw a test of the upper regions of these support levels on Thursday as the gold price bounced from the $1850 level. The GDX has now corrected 19% from its early August peak, while the GDXJ has corrected 21%. Since the March 2020 lows, this is only the second correction for gold and gold equities with an earlier 15% pullback in May/June.

When considering the GDX printed an over-extended 175% move higher in just five months before this weakness began, a 19% correction to consolidate those gains may, or may not, be enough. During the GFC, gold and gold equities gained 46% and 118%, respectively, from mid-November 2008 (when inflation expectations bottomed) to the end of 2009. After the 118% move up in 2009, the correction in GDX was essentially two months and 15%, with no retest afterwards.

Although the key $1865 level in December Gold has held on a Comex closing basis thus far, gold futures may indeed test the $1750-$1800 region if this key level is lost. The 200-day moving average in the GDX, which is at $33 and rising, could then come into play.

With plenty of uncertainty on tap heading into the U.S. election on November 3rd, we cannot rule out this possibility. I expect the biggest possible catalyst for gold testing this lower region would be margin-call selling in equities along with heavy U.S. dollar inflows during “crash season.”

What we are experiencing in the gold space is an extended consolidation after a period of exceptional price strength. This is to be expected and very healthy with respect to Phase Two of a sustainable rising secular gold bull market that began in late 2015. The bottom-line is that this simple retracement after the extreme overbought extended move above $2000 does not take away from gold’s overwhelmingly positive long-term macro fundamentals.

The gold bull will do everything in its power to shake off as many riders as possible. Since we are now in a buy and hold bull market in the mining sector for the first time in nearly a decade, maintaining core positions while trimming profits after over-sized gains is strongly recommended in the long-term.

Once December Gold closed below $1920, I alerted my subscribers immediately on Monday afternoon to the probable near-term danger/opportunity in the gold complex. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

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.