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Oversold miner ETF's testing 7-year breakout levels

Commentaries & Views

Gold futures on the Comex traded below $1,700 on Thursday, after remarks on the U.S. economy by Federal Reserve Chairman Jerome Powell sent bond yields and the U.S. dollar soaring. The benchmark 10-year Treasury yields rallied 4% and recaptured 1.50% on Powell's comments, while the U.S. dollar index rose to three-month highs above 91.50.

The most powerful monetary policymaker affirmed his stance to keep credit loose in a speech to the Wall Street Journal jobs summit held yesterday and added that although the rise in treasury yields was 'notable', he did not consider it a 'disorderly' move. He also said it is 'not appropriate' to isolate one interest rate or price and transient inflation will not affect inflation over the long run.

Inflation in the U.S. is expected to rise, according to Powell, as the national economy begins to reopen, "we will see inflation move up through base effects. That could create some upward pressure on prices."

Powell also mentioned he does not foresee interest rates rising at all this year until employment and inflation are back to sustainable levels. In yesterday's Beige Book release, the world's largest central bank stated that employment is of utmost concern for the U.S. to make a full recovery.

The just-released Non-Farm Payrolls (NFP) report for February from the U.S. Labor Department showed the key non-farm payrolls number up 379,000 compared to forecasts for up 210,000 in February. The unemployment rate was 6.2%. The better-than-expected jobs report is putting moderate downside price pressure on gold and silver futures this morning.

While the Fed Chairman has been clear for the past few weeks that the Fed is not yet considering yield-curve control (YCC), the bond market continues to fall and U.S. yields are rising with bids coming into the U.S. dollar, weighing on gold prices down to critical support levels.

The sustained wave of gold selling pressure has mirrored the bottom and latest upswing in 10-year U.S. real yields. Since August of 2020, gold futures have lost $400, or nearly 20%, while U.S. bond yields have tripled.

Furthermore, equities are starting to sell-off every time yields go up, as investors are worried that the Fed is underpricing inflation. Economist David Rosenberg pointed out last week that a 1% increase in U.S. interest rates takes $800 billion from the U.S. economy, or 4% from GDP due to debt service charges.

Although gold price action has faced considerable selling pressure over the last few months, the precious metal continues to trade within the confines of a broader bull flag correction of outsized gains. For the past seven months, the decline has remained in a downward channel after gold doubled since the low in late 2015 into the extreme overbought and hyped-up August high at $2089.

The precious metal has become oversold and generally despised recently, as sentiment has reached levels of previous bottoms. I also expect the latest Gold Commitments of Traders (CoT) report, issued later today, will show spec long liquidation from last week down to levels not seen since before the breakout of a 6-year base below $1400.

Technically, after doubling in price to $2089 in August of 2020 from its low of $1045 in late 2015, gold futures reached the 38.2% Fibonacci retracement level at $1690 during the Comex session on Thursday. But as U.S. stocks fell sharply after Federal Reserve Chair Jerome Powell failed to reassure investors that the central bank would keep surging bond yields and inflation expectations in check, the miners closed up on the day while April Gold traded below $1700 in the aftermarket.

Meanwhile, both the GDX and GDXJ are in the process of testing their respective breakout levels of a 7-year base at $31 and $45 respectively, while the GDXJ continues to show relative strength as capital markets remain very accommodative. The GDX has thus far corrected 32% of its 170% move higher from last year's March bottom into August 2020, while the GDXJ has corrected 30% of its 185% rise. The sharp increase higher in the mining complex took just 4.8 months, while the consolidation of those outsized gains has lasted a tedious seven months to date.

Although the GDX has made a lower low during this 7-month correction, GDXJ has thus far kept $4 above its June low and quality juniors are cashed up into 2022. It is also interesting that even though the HUI Gold Bugs Index, which excludes royalty firms, traded a bit below strong support at 250 this week, the index has yet to close below this critical level.

Moreover, extreme oversold bellwethers Barrick Gold (GOLD) and Franco Nevada (FNV) are currently trading at lower weekly Relative Strength Index (RSI) levels than when they both bottomed in late 2016, while maintaining healthier balance sheets and paying higher dividends. In fact, Barrick Gold in particular has given back the entire 2020 rally and is valued currently at late-2019 share price levels when gold was trading below $1500.

With gold getting close to an oversold bounce, a Senate vote on final passage of President Joe Biden's $1.9 trillion coronavirus aid bill could come over the weekend. With no votes to spare, Democrats tweaked the bill to ensure all 50 of their members would support it. "The time is now to move forward with big, bold, strong relief for the American people," Senate Democratic leader Chuck Schumer said.

In the meantime, capitulation selling has been coming into many of the higher-risk juniors this week, providing contrarian speculators with long-term horizons excellent entry points on companies de-risking quality assets. The stink-bid prices suggested to my subscribers on select juniors I own and cover in the Junior Miner Junky newsletter a few weeks ago are being filled, as panic selling has entered into the junior complex.

This is a good time for resource stock speculators to take advantage of the current weakness and perform proper due diligence on a carefully selected watch list of quality juniors. If you require assistance in doing so, and would like to receive my research, newsletter, portfolio, watch list, 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.