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Gold moves above key resistance at the $1800 level

Commentaries & Views

Gold has been trending higher since a daily double bottom at $1675 was reached at the end of March, trading in the upper range of a 9-month bullish descending channel. The $1,800 level has proven to be  formidable resistance towards the middle of this trend over the past few weeks.

On Thursday, the gold market began to factor in more and more clues surfacing to suggest inflation will rise beyond what central banks expect to see, and that Federal Reserve policymakers seem unlikely to budge on their accommodative stance any time soon. Investor inflation fears boosted the gold price 1.75% higher yesterday, along with a weaker dollar and easing Treasury yields, propelling bullion over this important $1800 level.

Although dovish Fed-speak failed to provide a catalyst to break through this key overhead resistance line last week, gold zoomed quickly toward $1800 on Monday after the April U.S. Manufacturing Prices Paid Index (PPI) report. The index rose to 89.60, up 4.67% from last month and up an incredible 153.8% from a year ago. In fact, all 18 industries surveyed saw higher prices.

Moreover, gold received a boost from notorious gold detractor Warren Buffet heading into the Comex session to begin the week. During Berkshire Hathaway’s annual shareholder meeting on Saturday, Buffett said that his company is seeing rising price pressures among its various businesses and investment. "We are seeing very substantial inflation," Buffett said. "It's very interesting. We are raising prices. People are raising prices to us, and it's being accepted."

But after rising withing 50 cents of $1800 on Tuesday, gold futures reversed sharply when U.S. Treasury Secretary Janet Yellen said U.S. interest rates may need to rise to prevent the economy from overheating as more of U.S. President Joe Biden's economic investment programs come on line and boost growth.

"It may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat, even though the additional spending is relatively small relative to the size of the economy," she said in taped remarks to a virtual event put on by The Atlantic.

Market analysts pointed to the statement on interest rates by Yellen, a former head of the Federal Reserve, as the main factor influencing the day's sell-off in equities as well. Longer-dated Treasury yields also ticked higher after her comments, which kept pressure on the gold price.

However, these comments were walked back by Yellen later in the day when she spoke at the Wall Street Journal's CEO Council summit. The Treasury Secretary clarified that she wasn’t trying to predict interest rate hikes to rein in inflation pressure, and does not see a sustained problem for the economy as it bounces back from Covid-19 and therefore, does not anticipate inflation being a problem.

Additionally, we had several Fed officials reassure the markets on Wednesday that the U.S. central bank will continue to provide monetary support to the economy, and that despite "gangbuster" growth in the first quarter, the economy is still a long way from the Fed's goals.

Asked about when the Fed should start talking about reducing its bond-buying program, Fed Vice Chair Richard Clarida told CNBC, "We don't think so right now." With the true U.S. unemployment rate closer to 10%, he said, expected price rises as the economy reopens in coming months won't likely persist into next year. "Our baseline is that we don't overheat," he said.

We also saw on Wednesday 79-year-old billionaire Sam Zell echo Warren Buffet’s comments regarding inflation, while announcing he has been pushed into buying gold. Zell, another seasoned investor that has eschewed owning gold in the past, told Bloomberg that he sees inflation everywhere as well.

"We are seeing it in all of our businesses. The obvious bottlenecks in the supply chain are pushing up prices," said Zell. "It's very reminiscent of the '70s." When asked if inflation will just be "transitory," Zell quipped, "didn't the Fed say that in the '70s, too?"

With the inflation genie clearly being released from its bottle, Tim Hayes, chief global investment strategist at Ned Davis Research told Kitco news this week, "The Federal Reserve has said it wants inflation to run above their target, and the risk is that as they let inflation run, they will end up behind the curve. It will be very disruptive for the market when they do start to react," he said. "Inflation is the genie in the bottle, and once it is let loose, it is difficult to get back in."

Here is something to consider regarding rising inflation sinking real rates lower in the very near future, as increasingly negative real interest rates have historically been the strongest driver of higher gold prices. The 10-year U.S Treasury is currently yielding about 1.6%. When subtracting the March Consumer Price Index (CPI) of 2.6%, the real yield on the 10-year T-Bond is minus 1%.

Since the March CPI number was released, lumber soared another 30% in April, while many other items also rose much higher. When the April CPI number comes out on May 12th, the index should be over 3% making the real yield on the 10-year T-Bond possibly minus 2%. If so, real yields this negative could be a strong catalyst for the gold price breaking out of its downtrend next week.

Once we see a weekly close above $1850, which lies at the top of a descending channel the gold price has carved out since peaking at $2089 last August, a technical breakout may take place from this 9-month bullish falling wedge.

Meanwhile, the miners had previously broken out of their respective technical downtrend by mid-April, when the GDX made a weekly close above $36. After trading down to test the breakout line of its 9-month downtrend last week, the global miner ETF is attempting to close above its 50-week moving average at $36.50 on the back of solid Q1 results from sector bellwethers this week.

Barrick Gold Corp (GOLD) reported a 78% jump in first-quarter profit on Wednesday, beating analyst expectations, and said it was on track to meet annual forecasts. In terms of numbers adjusted profit rose 78% to $507 million in the quarter, from $285 million a year earlier, and the global miner announced a 9 cent per share quarterly dividend.

Franco-Nevada (FNV) reported the same day that its Q1 2021 revenue of $308.9 million was 28% higher compared to Q1 2020 ($240.5 million) and net income of $171.5 million was 274% higher over Q1 2020. The gold royalty firm also announced that its board has declared a quarterly dividend of $0.30 per share. This is a 15.4% increase from the previous $0.26 per share quarterly dividend, marking the 14th consecutive annual dividend increase.

Continuing solid Q1 results from more majors next week may finally begin to convince the general retail market that precious metals miners are fundamentally sound and have the potential to generate solid and consistent returns over the long-term.

The recent general improvement in the sector's financial health should also lead to more M&A activity in the precious metals sector. If you require assistance in choosing quality take-over candidates in the junior space to invest and would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

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