Contributed Commentaries
Gold's bullish technical set-up heading into quarter-end
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
After drifting sideways in a tight $100 range for nearly a year, the month of March has seen gold volatility increase significantly with its price trading within a $185 range, driven mostly by the financial fallout from the crises in Ukraine. And once central bankers across the world ramped up the fight against rapidly surging inflation last week, gold has been attempting to create a new floor at the $1900 level.
With the first quarter of 2022 ending next Thursday, the price of gold moved towards its next level of resistance at $1950 after U.S. stocks fell sharply following Moscow's plans mid-week to seek payment in Roubles for gas sold to "unfriendly" countries.
More safe-haven buying came into gold above $1950 yesterday when President Biden met with other European leaders and NATO to discuss the situation in Ukraine. Biden, in an early evening news conference after the meetings, warned that a chemical attack by Russia "would trigger a response in kind."
A weaponized U.S. dollar as Russia's war with Ukraine enters its fifth week is creating more reasons for global central banks to diversify U.S. Treasury holdings into gold. After the crisis in Eastern Europe began, banks have ramped up the process of restocking gold at a pace not seen in years. Since March 1st, Comex vaults have seen the largest inflows since October 2020.
The U.S. Treasury issued a notice this week that gold transactions with Russia are prohibited, citing executive orders signed by President Joe Biden. And UK Prime Minister Boris Johnson also vowed to target Vladimir Putin's gold reserves, saying the "red line has already been crossed" of war crimes in Ukraine. The moves are coming after several lawmakers introduced the Stop Russian GOLD Act, meant to target Russia's ability to sell its gold reserves to avoid the impact of increased sanctions.
But with Russian civilians having their wealth decimated after the Ruble collapsed recently, another counter-measure to the financial war being waged against Russia is President Vladimir Putin may be considering to back the Ruble with gold. But the Russian leader would likely block any conversion internationally while doing so and thereby, create a two-tier system. Russia’s gold holdings currently sit at over 2,300 tonnes, making it the fifth largest gold reserve in the world.
The Kremlin has more than quadrupled the amount of gold held in Russia’s central bank since 2010, creating a "war chest" through a mix of foreign imports and vast domestic gold reserves as the third largest producer of bullion in the world. Russia held more gold than U.S. dollars for the first time in June 2020 with bullion accounting for more than 23% of the total reserves, which rose to $630bn as of last month.
Putin only backing the domestic Ruble with gold would restore confidence among the Russian people, but leave the Ruble to float for international transactions. This theoretical plan would be the opposite of what President Roosevelt did in 1934, when his Gold Reserve Act transferred ownership of all monetary gold in the United States to the U.S. Treasury and prohibited the Treasury and financial institutions from redeeming dollars for gold.
The current secular gold bull market began at the turn of the century and its first up-leg lasted a bit longer than a decade. During Phase One, the price of bullion made a decade-long monumental rise from around $250 per ounce to a parabolic blow-off top at $1920 in 2011. That was followed by a substantial 50% four-year correction when the gold pendulum swung back down, making a significant low at $1045 in 2015.
Phase Two of the current secular gold bull began from this major low, which saw bullion double in price to $2089 per ounce by August of 2020. Once the gold price made a monthly close above $1900 in February, the more recent healthy consolidation of out-sized gains ended after 19 months in February. And a further bullish technical hurdle for the safe-haven metal to overcome would be a quarterly close above $1975 next week.
For the past decade, the gold price has created a significantly bullish technical cup & handle pattern that would be completed once the $2100 level has been breached on a monthly closing basis. During the current secular gold bull, this is the second time a decade-long ultra-bullish cup & handle formation has materialized on the monthly gold chart.
From 1996 into 2005, the gold priced produced a similar bullish technical set-up, when the safe-haven metal took eight years to form a cup below resistance at $420 per ounce. The subsequent handle took two years to form and after the breakout occurred above $420 in mid-2005, the gold price zoomed to over $700 by Q2/2006.
Once the gold price eventually reached the $1000 level, sellers came in quickly as the safe-haven metal became extreme overbought while reaching an all-time high at the same time. Gold reacted violently when reaching the psychologically significant round number of $1000, and it is doing so again at the $2000 region.
Similar to the recently concluded consolidation period, it took the safe-haven metal another sixteen months to blow through the $1000 level. And once this important resistance level became a solid floor in 2009, the gold price ran to its Phase One blow-off top at $1920 two years later.
Meanwhile, the HUI Gold Bugs Index went from a secular gold bull Phase One low of $40 in 2001, to $638 in late 2011, which was a 1,600% move! A similar Phase Two move, which for the miners began in Q1/2016 at $100, could see the HUI run to $1600 within the next five years once the current gold cup & handle breakout above $2100 occurs.
Recently, both the GDX and GDXJ have been consolidating out-sized gains from the past six weeks after creating a strong six-month accumulative base. Yet many of the higher-risk/reward junior developer/explorers I have been drawing your attention to over the past several months, still have plenty of catching up to do.
After the GDXJ made back-to-back weekly closes above formerly strong resistance at $47, many of the juniors I own/cover in the Junior Miner Junky (JMJ) newsletter have begun to rise from strong multi-month accumulative basing patterns. And once the gold price builds a solid floor above the psychologically important $2000 level, I expect the undervalued quality juniors in this tiny sub-sector to begin rising more sharply as momentum traders and fund managers re-enter the junior space en masse for the first time since 2009.
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