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Gold posts its best quarterly gain since June 2020

Commentaries & Views

With U.S. and European stocks posting their weakest quarter since the pandemic crash of 2020, Gold Futures gained 6.6% during a tumultuous Q1. The safe-haven metal traded within a $300 range and closed Q1 above $1950, which is an all-time quarterly closing high. The last time Comex Gold Futures gained more for a quarter was in Q2 2020 when the metal rose 14%.

After the Western world began to wage a financial war against Russia during the first week of March, Gold Futures zoomed towards its record peak resistance at $2089, coming just $20 short of this major milestone. But the gold price became extreme overbought in the short-term, while doing so on the back of geopolitical turmoil.

Historically, when the marketplace is experiencing geopolitical shocks, gold prices tend to ‘pop' quickly and out-sized gains are not sustained. Yet the real story for gold has been that there was already a significant turnaround in the private investment demand for bullion before the Russia-Ukraine war began, particularly from North America and Europe. In fact, there has been a very large increase in the total known holdings of physically-backed gold exchange-traded funds (ETF's) since the end of January, which accelerated after the war in Ukraine began.

During the middle of the crisis in Ukraine, the Federal Reserve recently started a highly anticipated rate-hike cycle in mid-March. The gold price has been consolidating recent out-sized gains and tested support at the $1900 region for a second time on Tuesday. Yet buying came in quickly to produce a strong bounce from this important level as investors saw a key part of the U.S. yield curve invert for the first time in 16 years.

The main reason for the falling yield curve is the steep jump in the 2-year yield this week on expectations that the Fed is embarking on a more hawkish policy of raising short-term rates to combat rising inflation. Long term yields have also risen but at a slower pace than shorter yields. An inverted yield curve would be a warning of a possible recession, and also a warning for stocks which usually peak months before the start of an economic recession.

Once the U.S. five-year – thirty-year curve inverted on rising inflation fears this Wednesday, the concern is that high inflation is going to force the Fed to be more aggressive in hiking rates in a way that slows economic growth. When interest rates rise, mortgage rates go up and debt becomes more expensive to service.

The Mortgage Bankers Association (MBA) said the contract rate on a 30-year fixed-rate mortgage shot to 4.8% in the week ended March 25th from 4.5% a week earlier. That was the largest one-week increase since February 2011, and it brought mortgage rates to their highest level since December 2018.

The Personal Consumption Expenditures (PCE) report on Thursday showed slowing purchases and continued inflation in February. The PCE price index, which is the Federal Reserve's preferred method of measuring U.S. inflation, rose 5.4% in March on an annual basis. That is the most significant leap since April of 1983. Headline PCE spiked 6.4%, the fastest pace since January 1982, as gas and food costs are on the rise.

Also on Thursday, the Commerce Department showed U.S. consumer spending barely rose in February. An increase in spending on services was offset by declining purchases of motor vehicles and other goods, while price pressures mounted, with annual inflation surging by the most since the early 1980's. Consumer spending, accounting for over two-thirds of U.S. GDP, rose by a marginal 0.2%.

Inflation driven by supply chain issues and ongoing Russian risk in addition to rising rates, continues to push food and energy prices even higher, therefore reducing consumer's disposable income. This in turn is hindering the outlook for future profitability, creating a stagflationary environment where gold thrives.

Meanwhile, both GDX and GDXJ have recently been consolidating out-sized gains after building a strong six-month accumulative base on each of their respective weekly charts. The precious metal's mining complex has been showing relative strength to the gold price for the past several weeks and both miner ETF's printed 52-week high closes last week.

Initially, gold prices moved up to $2078 earlier this month, then corrected over 8% to the $1900 region in just over a week. Normally, if the gold price dives this far so fast, the market would expect to see gold equities correct somewhere between 10% to 15% at the very least.

Yet after rising for six consecutive weeks and becoming overbought with the gold price, both GDX and GDXJ have created bullish consolidation symmetrical triangles above formerly strong resistance levels during the month of March. When forming after a bullish move higher has become overbought, a symmetrical triangle chart pattern represents a period of consolidation before the price is forced to breakout.

With both GDX and GDXJ having already created  a strong six-month accumulative base, 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.

While bullish continuation symmetrical triangles are also being formed in many mining stocks and commodities, equally bullish inverse head & shoulder patterns are forming in many of the beaten down quality precious metal junior developer/explorers.  

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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.