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Miners are leading gold lower into the U.S.election...again

Commentaries & Views

Now that the marketplace has officially been denied fiscal stimulus until after the U.S. election by President Donald Trump on Tuesday, along with multiple European governments announcing more COVID-19 related lockdowns, both equities and gold are being sold to build up cash.

While the gold complex continues to consolidate earlier over-sized gains for a third month, the U.S. dollar has become the safe-haven of choice. The stronger greenback has bullion selling down towards recent support at $1850 ahead of the highly anticipated outcome of the U.S. election next week.

When we were heading into Super Tuesday at this time in 2016, I wrote about the miners beginning to show relative weakness to the gold price. The gold stocks were warning us of the sharp drop that followed, and once Donald J. Trump was surprisingly announced the 45th president of the United States the following week, gold sold off sharply.

Last week, the miners began to show relative weakness to the price of gold once again, as we head into what is arguably the most contentious and controversial U.S. election since 1960. Although the gold price is bouncing a bit this morning from options expiry selling earlier in the week, the weakness seen in the gold complex and renewed dollar strength are both warning signs of rising risk aversity due mostly to election uncertainty.

I expect the U.S. to remain highly polarized into a clear election victor, which may not be certain until some weeks after November 3rd. There has been rising controversy over U.S. election mail-in ballots, along with the looming question of whether President Trump will accept and recognize the results if Biden wins, or vice-versa. 

It appears as though the marketplace is beginning to price in the most significant risk next week being a contested election. If this scenario unfolds, then all assets, including gold, may continue to sell off. Once investors begin to lose trust in the electoral process, increasing exposure to the world’s reserve currency would be expected.

December Gold will need to hold the $1865 level on a Comex closing basis, 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 $1775 level as well, so a test of this closely watched support line might tie in quite nicely for a more sustainable bounce along with increasing interest by the longer-term “buy-and-hold” investor.

Meanwhile, under this possible scenario, the GDX may come down to test its 200-day moving average which is rising towards $35. And the GDXJ could test its former 7-year resistance line at $49, or a bit lower at its 200-day moving average that is rising towards $48.

In the short to medium term, considering the pandemic’s growing negative economic impact on the global economy, I expect the $1750-$1800 region would attract strong buying due to promised continued monetary and fiscal support that eventually may lead to rising stagflation and a weaker dollar.

Investors have been attracted to gold for a number of reasons during the past year and that support is expected to continue no matter who eventually is declared the victor of the U.S. election. The long-term macro fundamentals continue to favor gold remaining in a bull market for the foreseeable future, as global interest rates are at rock bottom levels and are likely to stay there for a prolonged period of time. 

Although the miners’ recent relative weakness is projecting a bit more downside before this correction has reached a significant bottom, the good news is that attractive entry points are being created in quality juniors for patient investors. And with the possibility of panic selling coming into the market place next week, now is a great time to put in “stink bids” – a bid that is far below the current market price of a stock.

Last week, I alerted my subscribers regarding my intent to take profits in a few junior positions with out-sized gains ahead of the selling which I expected to take place due to the U.S. election jitters. While continuing to hold our long-term core junior positions, we now have more cash to take advantage of a further sell-off in the sector next week, if one indeed materializes.

This week, I will be giving Junior Miner Junky (JMJ) subscribers technically targeted stink bid price suggestions for each of the 27 juniors contained in the real-money JMJ portfolio. 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.