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Miner relative weakness hinting of gold selloff into quarter-end

Commentaries & Views

"The ides of March are come.

Soothsayer: Ay, Caesar; but not gone."

? William Shakespeare, Julius Caesar

After a parabolic move higher in less than 5 months from a low of $1450 seen last March, the gold price remains mired in an 8-month correction. The lengthy consolidation of out-sized gains after hitting an all-time high of $2089 has been unnerving for gold investors, with patience beginning to wear thin.

During this secular gold bull that began at the turn of the century, the price of bullion has a tendency to move much higher than most expect before correcting, then much lower than investors expect before bottoming. Especially after gold has cleared a significant round number on its way to making an all-time high.

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 16 months before finally blowing through the $1000 level once the Fed re-capitalized U.S. banks with the printing press. But during the GFC in 2008, it was the financial sector that needed a bailout; just over a decade later, it's the entire economy.

On March 11th, 2020, the World Health Organization (WHO) declared COVID-19 a pandemic. The gold price was trading at $1,640 before the announcement, near its then recent high of $1,690. By early Monday, March 16th, during shock and panic selling of most everything but the U.S. dollar, gold temporarily touched $1,450 on its way to quickly regaining the $1,500 level and making a "V" shaped bottom.

One year later, while most western economies remain in various versions of forced government mandated lockdowns, more than US$12 trillion has been created out of thin air and invested in keeping the economy afloat with people in their jobs. And this does not include the most likely passage of a bi-partisan, multi-trillion-dollar infrastructure package later this year.

President Biden will travel to Pittsburgh next week, where he is expected to push for a "Build Back Better" plan that could have a price tag as high as US$4 trillion to pay for traditional roads and bridges, while also tackling climate change and domestic policy issues like income equality.

Governments around the world are on a desperate spending spree, and in the process, adding massively to the now US$281 trillion of total global debt. At the end of 2020, combined world economy debt exceeded global GDP by a breathtaking 350%.

Government debt in the U.S. alone is surpassing US$27 trillion and, as a percentage to its GDP, is expected to rise above 110% in 2021. This means the accumulated debt of the government is exceeding the economic capability of the country. After the U.S. money supply grew by more than 20% in 2020, the Fed's balance sheet is expected to reach $10 trillion by the end of 2021.

Since the gold price made its "V" shaped bottom last March, just like the significant low 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 famous saying attributed to Republican Senator Everett Dirksen in the 1960's, "A billion here, a billion there, pretty soon, you're talking real money" is merely chicken feed now that trillions are being dispensed on the world's largest central bank's computer keyboard.

Nevertheless, aside from the endless creation of monetary stimulus via Modern Monetary Theories (MMT), gold has corrected 20% from its high. Since hitting a low during the second week of March at $1673, gold remains short-term bearish on a technical basis after failing several times to break through resistance at $1750. This has set up a possible re-test of strong support at the $1670-$1690 region next week.

Despite the longer-term macro fundamental's arguing that gold will eventually go much higher, nominal interest rates have been rising faster than inflation creating a headwind for the gold price. But the newfound yield support is driven by inflation expectations rather than real rates, which remain negative, as fiscal stimulus is likely to result in ever-growing U.S. twin deficits.

Meanwhile, silver has also begun to weaken as its industrial component has been selling off with over-valued equities. The recent strength in the U.S. dollar has been keeping the Nasdaq on the defensive, along with continued pressure on silver and gold stocks. The sudden relative weakness of silver to the price of gold that began on Monday does not bode well for the precious metals complex in the short-term.

Moreover, gold stocks relative weakness to the price of bullion this week, while gold remains well above the $1700 level, could be hinting of another move down to test recent lows into quarter-end next Wednesday.

The GDX has strong support at the $30-$31 region with more support at $29, which is the 50% retracement level of the August high. The higher-risk GDXJ, which began to bearishly lead the GDX lower this week, tested strong support at $45 yesterday and has more support at the $41-$42 region.  

On the upside, once we see a weekly close above $35 in the GDX along with $1775 in the gold price, the odds will increase of a sustainable precious metals sector bottom being in place.

What we are experiencing in the gold space is an extended consolidation after a period of exceptional price strength into an all-time high. 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.

With many quality juniors having corrected 50% after making huge moves into last August, this is a good time for precious metals stock speculators to take advantage of the current weakness and position themselves before the next gold up-leg. 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.