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Gold Holds Key $1800 Support as Recession Fears Mount

Commentaries & Views

Gold Futures opened 2023 at $1825, then reached a year-to-date high of $1975 on February 2 after the first Federal Reserve meeting of the year. But continued signs of inflation, a strong U.S. dollar, and rising bond yields on the back of a surprising release of a very strong U.S. jobs report for January all helped to push the gold price towards key support at $1800 by the end of the following month.

After a two-month roller-coaster ride beginning to the new year, the volatility in the gold market is far from over as geopolitical tensions are not letting up, which is working in gold's favor in terms of finding a bottom in this downtrend. In an op-ed piece appearing in the Izvestiya newspaper on Monday, former Russian president Dmitry Medvedev warned that the west is risking nuclear war if they continue to supply Ukraine with weapons.

Then on Tuesday, just before reaching the 50-week and 18-month moving average support level at $1808 on month-end book squaring, decreasing inflation expectations in the CB Consumer Confidence report release triggered an oversold bounce in Gold Futures. Follow through buying continued into early Wednesday by higher-than-expected Purchasing Managers Index (PMI) readings in China, to reach initial resistance in Gold Futures at $1850.

The latest inflation data from the U.S., the UK, and the EU are all showing evidence that the fight against rising prices is far from over, bringing fears that elevated inflation could become stubbornly entrenched into many parts of the economy. And with the latest wave of global economic data showing price pressures continuing to surprise on the upside, investors growing concern that global central banks will eventually cause a recession with higher-for-longer rate hikes is supporting the gold price.

Yet, even though the Fed maintains a plan on getting back down to a 2% inflation target, the probability of reaching that goal in this new global environment is nil as prices for most everything citizens need to support their families are also proving to remain higher-for-longer than expected.

Thanks to higher-than-expected inflation having investors fearing higher interest rates, stock markets have not fared very well since the end of January either. The S&P 500 has rolled over to test its 200-day moving average this week, also breaking the rising support line extending back to its October low. The Gold/S&P ratio has been bullishly tending higher since the start of the year, showing smart money rotation of investment capital into bullion beginning in 2023.

While the Fed would like to keep its hawkish narrative alive, the reality is that Americans are losing confidence in the U.S. economy as the cost of living continues to rise. On Monday, the Conference Board’s Consumer Confidence Index fell this February for the second month in a row. The index is now 102.9, beneath January’s reading of 106. The Present Situation Index, calculating consumers’ assessment of the current market conditions, was slightly higher in February coming in at 152.8 compared to last month’s reading of 151.1.

The heightened geopolitical tensions and unpredictable weather patterns are leaving basic commodity prices at elevated levels that are here to stay. Rising input costs will ultimately lift the prices of all goods and services, with those costs being passed on to the consumer that will be forced to take on even more debt. Total private U.S. debt to GDP is already roughly 280%.

Moreover, once delinquencies become a problem, consumer spending will slow down. The Michigan Consumer Sentiment Index rose to 67% in February, the highest level since January 2022. But the index is still down at levels last seen during the 1973–1975, 1980–1982, and 2007–2009 recessions.  

The rising borrowing costs will steer the economy into a recession to where political leaders begin pressuring the Fed into reversing monetary policy. The current rate of interest payments will likely only accelerate, as new debt is issued at much higher levels.

Within the next year, the U.S. is looking at approximately $1.3 trillion of annual interest payments alone, dwarfing all other expenditures and exponentially accelerating the build-up of the now over $31.5 trillion deficit. And while debt continues to rise far as the eye can see, the Federal Reserve, along with the U.S. government, would then run the risk of a debt spiral that would quickly destroy the world’s reserve currency.

While the Fed has allowed a global environment of rapidly rising inflation by being late to begin its most aggressive rate-hike cycle in over 40 years, the world's most powerful central bank is no longer inflating the money supply. As the late great Richard Russell taught us years ago, the Fed must inflate, or die, while gold always does what it is supposed to do, but never when we expect it to.

With major central banks raising rates at a rapid pace, liquidity in the system is drying up. After exponentially increasing global debt to "save the system", now they are charging more for that debt in the form of rate hikes. But with leading economic indicators and yield curve inversions issuing stark warnings of recession to begin during the second half of this year, the world's most powerful central bank will ultimately have to pivot dovish to save face.

Regardless of whether 2023 ushers in a period of stagflation or projected a recession, there is no denying that the current macroeconomic backdrop is creating a perfect set-up for the gold price to eventually breakout above the $2000-$2100 ceiling later this year.

Meanwhile, gold stocks remain historically cheap relative to the gold price with apathetic trading volume continuing to drift lower during price corrections. And the turnover volume for junior mining companies remains even more depressed, with the TSX Venture Exchange currently re-testing its prior historical volume lows last seen during the 2001 significant bottom in the mining complex.

Gold stock cycle capitulation has taken place every seven years since the turn of the century. The move lower in the PM mining complex from mid-2022 down into a nasty tax-loss selling conclusion by Q4 was another massive full-scale capitulation by gold stock investors. The last 2 bottom days in late September were 2X capitulation volume, with investors finally selling out of their gold stock positions.

This chart shows how the percentage of shares above the 200-day moving average was essentially at zero for 5 months, which led to investor psychology getting absolutely blown out 7 years from the previous capitulation into late 2015. The bottom was led by Gold Futures printing 7 down months in a row, which had not happened in 40 years. 

I have personally experienced and eventually benefitted from the two previous forced selling junior gold stock lows in 2008, and again in 2015. And after accumulating a basket of best in breed blown out juniors into the last two 7-year gold stock bottoms, a large dose of patience was required in order to eventually benefit from this winning strategy.

After quietly moving up over 50% from a 7-year gold stock cycle bottom in September, the GDXJ has corrected 20% of this move since the beginning of February on falling volume. With all gold and silver miner indices (GDXGDXJHUIXAUSIL, & SILJ) being extreme oversold based on daily Relative Strength Index (RSI) below 27 coming into this week, a move towards initial resistance at $37 in GDXJ with rising volume has begun. A technical confirmation of a bottom being reached in the junior space will be a weekly close above $42.

In anticipation of the incredible gains the junior sector should begin to experience once the gold price has a solid $2000 floor, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality juniors with 3x-10x upside potential into 2025-26.

If you require assistance in accumulating the 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.

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.