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Miners leading as gold prepares to tackle the key $1800 level

Commentaries & Views

Amid rampant bullishness with calls of $10,000 per ounce making headlines last year, gold futures made an all-time high at nearly $2,100 in August of 2020. The peak reached at $2089 marked a double from gold's December, 2015 low of $1045, while bullishness became extreme. Naturally, an extended consolidation took place as investors shifted focus on the economic outlook, with rising bond yields denting demand for non-interest bearing bullion.

With news headlines in March declaring gold having the worst start to the year in almost four decades, along with the worst quarterly performance in more than four years, a short-covering fueled move took place at the end of Q1. Dip buyers and technical traders have come into the gold complex since then, as Treasury bond yields have rolled over with the sinking U.S. dollar.

The low that took place on March 31st printed a daily "double bottom" above $1675, as fund flows out of the GLD ETF also look to have peaked in the process. This area of support is important technically, being the .382 Fibonacci retracement zone from golds rise off the significant low made in late 2015 at $1045.

After nearly reaching the key $1800 level earlier this week, the gold price has been consolidating recent gains while attempting to build a new floor above $1675 per ounce. The $1800 region also coincides with the top of a down-trending channel that has been in force since prices peaked last summer, creating a bullish "falling wedge" pattern.

Before losing this important level of support on a monthly basis in February, the $1800 region had also been strong resistance going back ten years. Needless to say, this key level in bullion now looms as a critical technical, and psychological juncture. The recent bounce could either fail around this region, or gather the strength to finally break out of the multi-month corrective phase.

As we head into the Federal Reserve Open Market Committee (FOMC) meeting next week, a catalyst for either scenario may be provided with Fed-speak. More of the same dovish rhetoric is expected from Powell, while computer algorithmic trades will be set to key words and phrases made by the Fed Chairman next Wednesday afternoon.

Nevertheless, the world's largest central bank's aim to lift inflation "moderately above" its 2% target seems assured to continue with its ultra-easy policies of near-zero interest rates, which is expanding the Fed balance sheet at an annual rate over $1.4 trillion. And with the federal budget deficit being projected by the Congressional Budget Office to total $2.3 trillion in fiscal 2021, this would be 10.3% of gross domestic product, as total U.S. debt has already reached 130% of GDP.

Also, the latest consumer price index (CPI) data out of the U.S. last week is starting to show some upward momentum, as prices advanced for the fourth consecutive month in March, with CPI advancing 0.6%. Inflation rose to a 2.5-year high to 2.6% compared to 1.7% in February. This is in stark contrast to the beginning of the pandemic when inflation went negative in March to April of 2020.

It is remarkable how anyone believes the CPI is even close to a remotely accurate gauge of inflation given all the doctoring involved via substitutions, geometric weighting, hedonics, and other gimmicks. So much so, that some investors on social media have already jumped aboard a popular trend — "tell me we have inflation without telling me we have inflation," pointing to a major divergence between the CPI data and real prices on the ground.

Although Fed Chair Jerome Powell insists that "the current level of debt is very sustainable," and the U.S. economy is going to temporarily see "a little higher" inflation this year, the gold price has begun to hint that this may not be the case.

Also, the European Central Bank (ECB) kept its interest rate and pace of purchases unchanged on Thursday. "The Governing Council will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over," the ECB statement said.

Meanwhile, gathering strength in the mining sector in recent weeks suggests investors are anticipating a breakout to the upside being imminent in bullion. Although gold investors were teased with a false breakout from the down-trend at the beginning of the year, the landscape has changed for the precious metal recently which leads me to believe a significant bottom may have already been reached.

As mentioned in this column last week, the GDX making a weekly close above $36 has signified that the miners have already technically broken out of their 8-month down-trend, showing relative strength to the gold price which has yet to do so.

Moreover, compared to the broader equity markets, the GDX has also been showing relative strength to the S&P500. The GDX is up 18% from its low in late March, which was a re-test if its 7-year breakout level at $31. The rebound follows a healthy correction of 35.4% from the ETF's 52-week high last August to its 52-week low in March. But over the past month, the gold stock ETF is up 8.7% versus a 5.7% gain in the S&P 500.

This is evidence of generalist capital coming back into the precious metals complex, as most major gold miners' recently-reported Q4'20 results revealed their best quarter ever per multiple key fundamental benchmarks.

Q4, 2020 revenues, adjusted earnings, operating cash flows, and cash treasuries surged to record highs. And sector bellwethers Newmont Corp (NEM) & Barrick Gold Corp (GOLD) are paying annual dividend yields higher than that of the benchmark 10-year Treasury note of 1.56%, while providing inflation protection that bonds cannot.

Furthermore, this week has seen many juniors begin to bifurcate higher from the sector, as global miners continue to show relative strength to the gold price. Select developer/explorer precious metal focused juniors, which I hold in my portfolio and cover in the Junior Miner Junky (JMJ) newsletter, have seen strong moves to the upside since Q2 began.

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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.