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Gold summer doldrums return after two-year hiatus

Commentaries & Views

Two weeks ago in this space, I mentioned the $1850 level in gold had cleared the upside on a monthly closing basis and successfully back tested its breakout. The $1850 level at that time coincided with the upper boundary of the downtrend channel from its all-time high at $2089. Once the downtrend line at $1850 was cleared last month, the gold price appeared to break out of a symmetrical triangle to the upside.

At the time, this signified the likelihood that the rally from a daily double bottom in late March had moved into a higher gear. Bullion had also broken through $1900 on a monthly closing basis and the next level in its crosshairs was the January 2021 high at $1960. But the gold price quickly fell back into the triangle during a sharp decline last week, and now appears to be headed towards its uptrend line near $1700 that has been in force since late 2018.

Last Wednesday provided the catalyst for an over 6% reversal, when the Federal Reserve jawboned a stop-loss run of a $150 waterfall decline to strong support at $1760 in Gold Futures. A subsequent oversold bounce on Monday was quickly reversed before reaching the all-important $1800 level, which has become strong resistance once again.

All it took to run the stops below $1800 in gold was for the world's largest central bank to go from "not even thinking about thinking about raising rates" to "thinking about thinking about raising rates" at the June FOMC meeting.

In fact, the biggest weekly gold move lower in 15 months took place despite the Fed not acting at all in response to the recent inflation surge showing the Consumer Price Index (CPI) nearly hitting 5%, along with alternative measures showing inflation running even higher.

After the dust settled from the sharp decline in gold, investors have been struggling to interpret signals from the Fed about how hot it is willing to let inflation run before the central bank begins unwinding pandemic-era monetary stimulus. With differing Fed officials jawboning between being hawkish, or dovish, regarding the future of monetary policy this week, investors have been sending safe-haven capital into the U.S. dollar, while "risk-on" continues in the marketplace.

Federal Reserve Chairman Jerome Powell met with lawmakers at Capitol Hill on Tuesday to ease inflation and labor shortage concerns. The Fed Chair reaffirmed the U.S. central bank's intent to encourage a "broad and inclusive" recovery of the job market, and not to raise interest rates too quickly based only on the fear of coming inflation.

"We will not raise interest rates preemptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances," Powell said in a hearing before a U.S. House of Representatives panel.

But on Wednesday, Atlanta Federal Reserve Bank President Raphael Bostic said the central bank would likely need to begin raising interest rates late next year, with stronger than expected inflation and the U.S. "well on its way to recovering from the pandemic. Much of the data recently has come in stronger than I expected," Bostic said in comments to reporters.

Although the stock market has reversed last week's losses and made new all-time highs this week, a daily bear flag has formed in both gold and silver into the last day for Comex June Futures and Options contracts of the precious metals today.

With both the miners and the silver price also showing relative weakness during the recent decline, caution is advised as the "summer doldrums" have now been officially ushered in after a two-year hiatus. The summer doldrums are the silent period of trading during the summer, when traders and fund managers are mostly on vacation.

Despite gold usually being weak during June through August, both 2019 and 2020 saw huge moves to the upside in the safe-haven metal. But with the gold price making an outside reversal to the downside in June that quickly removed all of the previous month's advance, a third year of summer bullion gains are now less likely.

Throughout the history of the secular gold bull market that began at the turn of the century, the gold price has a propensity for false moves lower, shaking off as many riders as possible before a strong up-leg can commence in earnest. A painful head-fake lower to get as many precious metal's longs out of core positions has preceded sharp up-legs in the gold complex in 2008 & 2020, before the next move to new highs quickly began from "V" bottoms.

However, there is one glaring difference compared with both 2008 & 2020 in relation to the financial health of precious metals stocks during the current consolidation process. The juniors are cashed up, as the capital markets have remained highly supportive during this now 11-month consolidation in the gold complex.

Furthermore, gold miners have completed their largest repayment of debt in history and are generating enormous free cash-flow with all-in sustaining costs averaging $1030 per ounce, while paying healthy dividends. Management teams have learned from their sins of the last gold bull and are reluctant to spend capital, as they patiently await a solid gold floor at $1800 before aggressively adding more ounces via M&A.

Although it remains to be seen if the gold price will continue lower in comparison with the aforementioned historic bear-trap's, there are several reasons to remain cautious in the short to medium term. The U.S. dollar has formed a double-bottom on its weekly chart, while recently becoming the safe-haven of choice as equities continue to make all-time highs.

Moreover, the GDX has begun to show relative weakness to the gold price, while the GDXJ has formed a bearish "Island Reversal" on its daily chart. And both appear to be working off short-term oversold readings by creating bear flags with gold and silver.

In preparation for the possibility of the gold consolidation continuing down to test the March low at $1675 by July/August, or perhaps lower if $1760 fails on a quarterly basis close next week, caution is advised. Holding core positions in quality juniors and some cash in U.S. dollars, while placing stink-bids in your favorite juniors, is recommended during the "Summer Doldrums" in junior gold and silver stocks.

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.