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Dismal retail earnings induce gold sector bounce

Commentaries & Views

With the Federal Reserve announcing its largest and most aggressive interest rate hiking cycle in 22 years earlier this month, the marketplace has been pricing in a likely upcoming recession. Although the Fed's planned quantitative tightening (QT) of its $9 trillion balance sheet has yet to begin as scheduled in June, the anticipation of the monetary punchbowl being taken away has already ushered in the worst start of a calendar year for the stock market since 1939.

After the Fed got caught in a trap of its own making by attempting to lull the market into a false sense of "transitory inflation" security, the market has begun to price in the central bank likely being too late to catch up with continually rising prices. Even former Fed Chair Ben Bernanke admitted in a New York Times interview last week that the Federal Reserve's delayed response to rising consumer prices "was a mistake" which would lead to a period of stagflation.

Historically, the Federal Reserve has never been right on monetary policy with a proven track record of setting the economy up for an even bigger crisis after papering over a previous one.

The phenomenal and unprecedented rise in the U.S. monetary inflation rate from early-2020 to early-2021 set in motion an economic boom that was driven by monetary stimulus. After the U.S. government response to the COVID-19 pandemic was to shut down the global economy, the central bank of the world's reserve currency dove head first into the ocean of Modern Monetary Theory (MMT) to solve all our financial problems.

The Keynesian reflationary actions during the pandemic by both the Fed and the U.S. government led the way to the increasing likelihood of economic stagflation ala the 1970's. And in doing so, all lines that are supposed to separate these two organizations were eliminated as the pretense that the Fed is independent of the government was dropped.

The massive debt created from this fiscal irresponsibility has risen sharply in the U.S., with debt for all sectors (government, corporate-financial and non-financial, household) now standing at $90.5 trillion. U.S. Federal debt is one-third of that while household debt represents 25%. Overall, that is an 80% increase since the Fed bailed out the banking system in 2008, while debt to GDP is over 130%.

The economic boom that followed this reckless economic policy into a stock market top on January 4th is now in the process of bursting after massive stimulus pumped into the system to foster it is on tap to be taken away. Ominous long-term Head & Shoulders (H&S) topping patterns have formed in the Dow, S&P 500, and Nasdaq, which are in the process of being completed.

For a pre-curser on how a stock market bust may unfold, the crypto complex has already seen $1.7 trillion in losses since November 2021. The loss thus far is already $400 billion more than the subprime mortgage crisis cost investors during the global financial crisis in 2008.

The poster-child for high-risk crypto speculation over the past several years has been bitcoin, which also completed an ominous H&S topping pattern last week. After breaking the neckline at $30,000 to move swiftly down to $25,000, the bitcoin price is in the process of back-testing this key technical level.

The ultimate downside technical objective after completing the bitcoin H&S topping pattern is $22,000, with a possible move down to the 2019 and 2020 rally highs at $12,000 in the case of a possible liquidity event taking out it's uptrend line at $20,000 after an over-sold bounce.

In anticipation of another Fed policy error, a huge amount of money has already been pulled out of all markets the past several weeks, including equities, crypto, and gold. Despite gold remaining undervalued relative to prevailing macro conditions, the safe-haven metal has recently been sold along with most everything else to meet margin calls.

Mass liquidation for traders and investors has come into the gold complex to make up for major losses seen in equity markets. When the going gets tough, gold is one of the easiest things to convert into cash.

However, once several big-box retailers reported dreadful earnings this week, the gold sector began to de-couple from stock market selling on Wednesday. The trigger for huge stock declines was Target's fiscal first-quarter report, which was chock-full of ominous indicators for the broader market and corporate America already being in recession.

The Dow Jones Industrial Average slid 3.6%, the S&P 500 dropped 4%, and the Nasdaq Composite tumbled 4.7% mid-week. The selling continued on Thursday and all three indexes are at or near their lowest closing values in more than a year, while the gold price has held up surprisingly well considering the parabolic rise in the U.S. dollar recently.

However, after the world's reserve currency broke major 20-year resistance at 104 on the DXY last week, the greenback is showing signs of a possible false breakout. The buck moving sharply lower on dismal retailer earnings, following the rolling over of the U.S. 10-year Treasury yield from over 3% last week, has the gold price shrugging off marketplace deleveraging to receive safe-haven bids again.

With U.S. treasury yields and the U.S. dollar rolling over as Fed-speak remained uber-hawkish this week, the market may already be anticipating a much earlier than expected Fed pivot to save the stock market during an election year. In the previous 2017-2019 QT cycle, the Fed ended up reducing reserve levels too much, resulting in upheaval in other short-term funding markets, an outcome it does not want to see repeated.

Stocks continued to selloff on Thursday, while the gold price zoomed to resistance at $1850 along with silver back-testing formerly strong support at $22. Although both precious metals remain in their respective downtrends since peaking last month, their de-coupling from continued stock market deleveraging is a positive sign for the sector. A weekly close in Gold Futures above $1900 would suggest that a sustainable bottom is in place.

The gold price has attempted to breach the all-important $2,000 per ounce level twice since the war in Ukraine began in late February - once in March and then again in mid-April. Although both times were unsuccessful, major support at the $1780 - $1800 region has proven to be very strong since the stock market peaked the first week of 2022.

Meanwhile, gold stocks were sold aggressively into last Thursday, along with the stock market and crypto. An oversold bounce began late last week in the miners after being sold down to critical support levels on both the GDX and GDXJ at $30 and $35 respectively.

Yet, both miner ETFs have created two downside open gaps on their respective weekly charts during the recent selloff that leave gold stocks susceptible to more pressure if they are not filled during this bounce. The first downside gap from the last week of April was back-tested, then sold down sharply the following week. The second downside weekly gap that followed coincides with their respective downtrend lines from mid-April peaks. 

As mentioned in this space last week, the miners may be in the process of forming a bottom after reaching the aforementioned strong support levels in the miner ETFs. But caution is advised until both downside weekly gaps in GDX and GDXJ have been filled. With the stock market possibly setting up a liquidity event, resulting in a flash crash, holding a large cash position in anticipation of buying opportunities if prices drop further is prudent at this time.

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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.