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Relative miner and silver weakness brings more caution into gold

Commentaries & Views

As geopolitical uncertainty rises, along with the growing threat of stagflation and a potential recession, more investors are placing safe-haven capital into gold. The gold ETF’s tracked by Bloomberg registered inflows of nearly 16 tons last week, being the 13th consecutive week to show inflows. Since the beginning of the year, inflows have totaled over 273 tons making ETF investors a key driver of the gold price.

Nevertheless, gold has continued to consolidate its recent outsized gains with rising bond yields keeping the safe-haven metal under pressure. Yields on 10-year U.S. Treasuries have climbed to just shy of 3% this week, their highest level since December 2018.

The recent rout in U.S. bond indexes has been the worst decline recorded in over 100 years of historical data. In fact, U.S. 10-year T-bond yields reached a 40-year downtrend line last week, which also coincides with the 200-month moving average. This is probably the most important trend line in the marketplace currently, as the level of bond yields plays a crucial role in setting several asset prices, including equities through the equity risk premium.

The Fed's plan to hike interest rates by 0.50% in less than two weeks could be the final nail in the coffin for the 10-year Treasury yield to end its 40-year downtrend and start a new long-term uptrend, effectively ending a decades long bull market in bonds. And if the 10-year U.S. Treasury yield decisively breaks above its 40-year downtrend, that could be seen as the start of a new uptrend, meaning a continued rise in interest rates and ongoing pressure on stock prices.

In the meantime, bullion has continued to hold its own against the firm U.S. dollar and high bond yields. Since the start of the year, the dollar index and gold have had a more than 80% correlation versus -0.34% in 2021, reflecting that investor’s see gold and the dollar as safe-haven assets amid the Russia-Ukraine conflict.

However, a sharp selloff in precious metal’s stocks and silver on Thursday was likely a precursor of the gold price losing support at $1950 on a weekly closing basis later today. There is more support at $1920, with stronger support at the $1890-$1900 level.

After both GDX and GDXJ had risen for 9 of the past 11 weeks from a strong 6-month accumulative bottom, the miner ETF’s closed down over 5% and printed ugly red candles yesterday with strong volume, while the gold price closed down marginally and held $1950 support.

This short-term bearish action was accompanied by an intra-day reversal in the stock market after hawkish comments by Fed Chair Jerome Powell spooked investors. All eleven U.S. sectors ended Thursday in the red, as "risk-off" was quickly ushered into the marketplace on growing concerns of the Fed becoming more aggressive in its monetary policy at the next FOMC meeting on May 3-4.

In March, price pressures in the U.S. were at 8.5% annually, which is the fastest pace since 1981. With inflation running over four times the Fed's 2% target, the market was already pricing in a 50-basis point hike at each of the next two FOMC meetings. But after Powell put one "on the table" for May in his remarks at the International Monetary Fund on Thursday, investors have begun to fear a third before year-end.

This means the Federal-Funds Rate could rise to between 2.75% and 3% by December, a full percentage point higher than the median rate anticipated by Fed policy makers in March, and a sharp rise from close to zero in January. Technical readings continue to indicate that stocks have probably peaked and are likely to be hurt by a more hawkish Fed, which is bullish for safe-haven gold.

During longer-term corrective periods in the mining complex, the sector tends to rise in stair-step fashion to become overbought at resistance levels, then take the elevator down to stronger support lines before stabilizing. And when silver is taken down with the miners, while both are showing relative weakness to the gold price, the odds increase of these support lines being tested quickly.

There is support in GDX on its sharply rising 50-day moving average at $37, with stronger support on its former long-term resistance line at $35. Although GDXJ has been attempting to create a new floor at its former long-term resistance line at $47 since mid-March, the higher-risk junior miner ETF has stronger support on its 200-day moving average at $43.

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