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Central bank rate hikes whipsaw gold traders

Commentaries & Views

The gold price began the week with a technically bullish monthly close near $1950 on Tuesday. The safe-haven metal rose $120 in January on the back of strong central bank buying data from the World Gold Council (WGC). Global central banks purchased 1,136 tons of gold in 2022, driving demand for bullion to the highest mark since 2011.

According to the WGC, global central bank purchases reached a 55-year high last year, driving a rise in annual gold demand of 18% to 4,741 tons, the highest level since 2011. In the second half of the year, central banks bought gold at a historically high rate.

In my second weekly column of the new year, I discussed the main reason for this trend likely being eastern central banks desire to diversify reserves away from the dollar after the U.S. froze Russia’s dollar-denominated holdings as part of its sanctions against Moscow.

The last time Gold Futures closed above $1900 on a monthly basis was in March of 2022 after war broke out in Ukraine. But the safe-haven metal then proceeded to decline an unprecedented seven consecutive months as the U.S. dollar rose to 22-year highs on the back of the most aggressive Federal Reserve monetary policy in over 40-years.

Due to $3 billion in annual withdrawals from exchange-traded funds that are backed by physical bullion, rising interest rates caused gold to decline from a record high above the key $2000 level for just one day in March of last year to $1620 per ounce in November.

Yet, this sharp $400 move lower from an intra-month high above $2000 level last year, resulted in a bear-trap reversal that began in November as central banks took advantage of retail ETF selling. The gold price has managed to recover $350 of those losses in just three months in anticipation of western central banks winding down aggressive rate-hike campaigns, while their eastern counterparts increase physical bullion reserves.

In September 2022, the gold price breached critical and obvious support defined by the lows of the preceding two years at $1675. But this headline-grabbing breach of an important support line did not result in the collapse most analysts were expecting. Instead, it marked the end of a 2-year bear trend and ushered in a cyclical bull market that has risen over 20% from a triple-bottom low at $1620.

The main catalyst behind this roller-coaster ride in Gold Futures the past 12-months has been major central banks manipulating interest rates in an attempt to steer their respective economies away from a likely recession.

The month of February kicked off with the Federal Reserve’s announcement this Wednesday of raising rates by an expected 25 basis points. The target range now sits at 4.5%-4.75%, marking the highest level since October 2007.

This is the eighth increase since March 2022, and the world’s most powerful central bank is not expected to pivot anytime soon due to historically high inflation. Inflation is nowhere near the 2% target, while Fed Chair Jerome Powell noted during the following press conference the need for “ongoing increases in the target range.”

Powell also reiterated his stance during the presser by saying that he does not foresee any rate cuts in 2023. Although it is possible that rates will remain below 5% after stating, "It is gratifying to see the disinflationary process now getting underway." 

After Powell left the door open to a Fed "pivot" sooner rather than later, the safe-haven metal zoomed to its upper weekly Bollinger Band resistance at $1975 into the following Comex trading session. But the move whipsawed gold traders who witnessed a $50 reversal in overbought Gold Futures by late Thursday on the back of the Bank of England (BoE), and European Central Bank (ECB) expected rate hikes.

Mirroring the Fed’s earlier message, the BoE also signaled the tide was turning in its battle against high inflation after the central bank raised interest rates on Thursday for the 10th meeting in a row. The move prompted investors to prepare for the end of its run of higher borrowing costs. But dissimilar of the Fed, the BoE is worried about aggravating what is expected to be the worst recession among big rich economies this year.

Next up on Thursday morning was the ECB raising rates by 50 basis points in February, as expected, with President Christine Lagarde committing to another 50-bps hike in March. Lagarde's refusal to commit to further hikes beyond the next meeting was seen as a pause.

After the U.S. dollar had been sold into the expectedly more aggressive BoE & ECB rate-hikes than the decelerated Fed monetary policy move, a “buy the news” bounce from the key 100 region on an oversold DXY triggered some healthy profit taking in overbought gold.

The selling pressure in gold increased this morning after the Bureau of Labor Statistics announced U.S. nonfarm payrolls rose by 517,000 last month. The monthly figure was significantly above the market consensus estimate of 193,000. The U.S. unemployment rate was also stronger than expected dropping to 3.4%, beating market consensus calls of 3.6% in January.

On the upside, gold needs a weekly close later today above $1900 to maintain its bullish momentum towards a test of the $2000-$2100 region. On the downside, there is uptrend support at $1875, with more support at $1840-$1850.

Meanwhile, a recent Gallup Poll shows that the collapse of confidence in government is now viewed as the greatest threat to its people. And even more so than inflation, ‚Äčthe immigration crisis, and the state of the economy. Gallup has reported that 21% of Americans name its incompetent government as the “most important problem facing this country today‚Äč” compared to the 15% who said so last year.

Gold is proving itself as being a hedge against political uncertainty and malfeasance, while the growing risk of recession, the debt limit, and war are all effects that could spur a move to all-time highs in the U.S. dollar gold price.

The fact that gold priced in a host of other major currencies is trading at or near new highs, suggests gold in the world’s reserve currency will eventually make new all-time highs as the metal of kings is rapidly becoming the safe-haven of choice in all major currencies. Once this takes place, gold will be recognized globally as being in a largescale bull market.

After quietly moving up over 50% from a 7-year cycle bottom in September, the miners have been experiencing a healthy consolidation of out-sized gains for the past few weeks. Many quality junior gold stocks that have experienced 2x-3x moves higher from strong basing patterns completed in late Q4 are experiencing healthy pullbacks.

Once a $2000 per ounce gold price that has been strong resistance for more than a decade eventually becomes a floor, a speculative frenzy in junior mining stocks may already be in progress. Before this relatively tiny sector comes back into favor, it is best to accumulate full positions in select quality juniors on weakness ahead of the coming herd of momentum trader's and institutional investors.

During the second half of 2022, the Junior Miner Junky (JMJ) newsletter carefully constructed a concentrated portfolio of exceptional junior resource stocks with 3x-10x upside potential to hold for long-term gains during the current up-leg in the mining space.

If you require assistance in accumulating best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
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