Everyone back in the pool at the gold bottomz inn
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Precious metals set all-time price records in 2020, with gold exceeding the $2,000 mark and silver nearly touching the $30 level, but prices have been mired in a healthy consolidation of over-sized gains for the past four months.
The correction that began in early August shaved as much as 15% off gold's peak into the end of November, toppling the precious metal from an all-time high of $2,089 all the way down to the $1,770 level on Monday.
In fact, the "gold trade" has essentially been left for dead in recent months, while risk appetite has returned to the marketplace. With the Dow Jones index hitting the 30,000 level on vaccine hopes, along with signs of an eventual start of the transition in the White House, late-comers to the gold party have been sellers.
As mentioned in my November 13th column, when gold futures whipsawed $118 lower during a single session and closed below $1865 on the Pfizer vaccine news, the sharp selloff below this support level brought back the possibility of the $1750-$1800 region being tested.
Then last week, the bears ran the stops below $1850 as gold futures continued to spiral lower during the expiry of the December Gold contract. When the key $1800 level was breached, the bottom fell out of the gold futures market despite the U.S. dollar making a 2-year low.
During gold correction periods coming into major U.S. holidays, Bullion Bank short sellers will try to hit a quiet market by surprise when they believe volume will be thin, such as last week. But although manipulation of the gold sector is commonplace, the general trend of the safe-haven metal, which remains bullish, cannot be manipulated.
Technically, the $1750-$1800 region in gold is strong support, and the 50% Fibonacci retracement level from August's all-time highs was tested and held at the $1770 level on Monday.
Gold futures basis $1750-$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. What was once strong resistance during the first phase of the secular gold bull that began at the turn of the century, has likely now become strong support during phase two, which began in late 2015 after a nearly 50% correction.
Moreover, this region also coincides with the 50-week moving average, which was also tested and held during the March selling panic in bullion down to $1450. The safe-haven metal then went on to rise over $625 from this strong line of support, reaching an all-time high in less than five months.
Gold has risen $60 since testing its 50-week moving average at $1765 on Monday, as the dollar continued its decline with investors clinging to hopes of an eventual breakthrough in negotiations over a fresh U.S. coronavirus aid package.
U.S. lawmakers were unable to agree on a fresh relief package, but there are signs this week that a $908 billion bipartisan proposal was gaining support as a negotiating tool. If those funds aren’t enough, there’s another $455 billion left over from the original $3 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act approved in March, that could also be appropriated for current use, the group said.
A number of Fed officials stressed the urgency of another fiscal package this week, while Treasury Secretary nominee Yellen warned against a self-reinforcing downturn. Some investors are also betting that the Federal Reserve could start buying more long-term U.S. Treasury’s as soon as its next FOMC policy meeting in less than two weeks, which has benefitted the gold price recently and kept bond yields from rising higher.
With more than $27 trillion in national debt and a total debt to GDP ratio of nearly 144%, the Fed essentially cannot afford to raise rates. In fact, interest rates near zero likely will stay in place not for months but years, as the Federal Reserve seeks to reengineer an economy characterized by low inflation and an uneven labor market.
Furthermore, congress will need to agree on a budget by the end of next week to prevent the shutdown of federal agencies. The uncertainty over this could weigh further on the U.S. dollar and bring more buying into an over-sold gold complex.
House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell spoke Thursday for the first time since the 2020 election, as Congress scrambles to strike a coronavirus stimulus deal and prevent a government shutdown. The leaders have signaled they want to resolve both thorny issues by Dec. 11th, the last day of government funding.
Global debt is now rising exponentially towards $280 trillion by year-end, and global central banks remain trapped into buying most of the debt recently created. It has become obvious there is no intention of ever paying it back. As a result, rising inflation expectations eventually could transform into a collapse in monetary/economic confidence, at which point gold would exhibit extreme relative strength.
Additionally, the silver complex has been showing relative strength to bullion as its industrial component kept the metal in a tighter trading range during the gold futures shake-out last week. With manufacturing already accounting for more than half of all silver consumption and industrial uses continuing to expand, demand should remain robust during a Biden administration that is pushing oil alternative technologies.
Meanwhile, both GDX & GDXJ tested and held their respective 50-week moving averages last week as well. While the mining complex was showing relative weakness to gold into the bullion price plunge, many quality juniors began to show relative strength when the stop-run was running its course into this Monday. But the most bullish divergence in the complex has been taking place in SILJ, as the higher risk silver junior ETF continues to show strong relative strength to the lower risk miners.
Moreover, it appears we may have made a double bottom in the GDX/GLD ratio last week, which has increased the odds significantly that a sustainable bottom has begun to form in the mining complex. While many juniors were already showing signs of being sold out last week, I expect others to bottom soon as tax-loss selling ends in each one, and in differing time frames.
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