Gold futures test key $2000 resistance into the end of Q1
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
As the final day of a volatile first quarter ends later this afternoon, Gold Futures are looking to close above 12-year resistance at $2000 per ounce on a monthly/quarterly basis for the first time in history. Although bullion priced in U.S. dollars has visited the $2000-$2100 region on two previous occasions over the past 32-months of grinding sideways action, gold bulls were denied of a sustainable breakout to all-time highs each time.
The first-time gold approached the $2000 level was on the heels of pandemic related lockdowns, which took place three years ago this month. Five months after the Federal Reserve came under pressure to provide trillions of U.S. dollar liquidity to keep governments and businesses afloat, Gold Futures peaked at $2089 in August 2020.
With the gold price becoming long-term extreme overbought from the doubling of its price in four years, a 2-year consolidation process saw the $1675 level become key support. Technically, this made sense, as the closely watched line of critical support was the 38.2% Fibonacci retracement level after the doubling of its price from a low of $1045 in late 2015.
Then came the geopolitical catalyst of the Russia-Ukraine war taking Gold Futures into the $2000-$2100 zone again last year at this time. But once the marketplace was convinced this war would not escalate into a global conflict, the gold price sold off a total of over $450 from a “double top” peak for an unprecedented seven consecutive months.
Only this time, a sharper selloff below the critical $1675 gold support level on a monthly closing basis by September 2020 spooked even the staunchest gold bulls. Yet, bears were denied an expected breakdown when instead the move turned into a bear trap, taking many long-term bulls out of position as calls of sub-$1400 gold dominated the headlines.
Gold Futures then hit approximately $1620 for the third time at the beginning of November, printing a “triple-bottom” on its monthly chart to avoid a massive breakdown. This marked the end of the multi-month correction and the beginning of another rally towards $2000, which has taken us to the third test of the $2000-$2100 region now in progress.
After the past two tests of this all-important zone of overhead resistance failed, there are several reasons for a technical breakout being successful during this current move higher.
When the Wall Street Journal reported four economists found 186 other banks share the characteristics that contributed to Silicon Valley Bank’s (SVB) recent failure in mid-March, U.S. Treasury Secretary Janet Yellen stated depositors must be protected at all costs. But with an estimated $10.5 trillion in uninsured deposits in the U.S. vs. only $7.4 trillion in insured deposits, where will the Fed get the money to bail out everyone?
After two weeks of banking turmoil, the Federal Reserve continued to raise its benchmark interest rate for the ninth time in just over a year last Wednesday, while simultaneously adding nearly $400 billion to its balance sheet. The recent banking crisis liquidity injection has already offset 60% of the reduction in the Fed’s balance sheet since April 2022.
The Fed also signaled that it might be nearing the end of its rate-hike cycle last week. 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 ahead by hiking rates into recessions.
Federal Reserve Board Vice Chair for Supervision Michael S. Barr testified before Congress on Tuesday and Wednesday this week, revealing that the situation at SVB was worse than previously thought. The bank run that began on March 9 saw $42 billion withdrawn from the bank. When regulators stepped in on September 10, depositors tried to withdraw an additional $100 billion, and the bank would not have been able to pay. Barr is now seeking additional regulations for banks with over $100 billion in deposits.
When the Fed is faced with the choice between inflation, or the economy, the U.S. central bank will always choose the latter. "When forced to choose, they are going to give up the inflation fight to take care of a growing unemployment problem and a growing economic pivot," DoubleLine Capital CEO Jeffrey Gundlach told CNBC this week.
And cutting rates in this inflationary environment is very problematic as the Fed's monetary policy response will weigh on already high price pressures, Gundlach added. "If we have a recession against this financial system, the Fed will have to act very dramatically. It is always more deficit spending and more quantitative easing," the billionaire “Bond King” said. "Almost everybody realizes there's a recession coming. It is just a question of how severe it is going to be."
With the market already pricing in a possible rate cut in June, gold has been sniffing out a premature rate cut despite inflation remaining nearly three times higher than the Fed’s mandated 2% target. Towards the end of the last rate-hike cycle in 2019, gold rose $700 into mid-2020.
Moreover, the increased weaponization of the U.S. dollar has seen eastern central banks, led by China, ramp up sales of U.S. Treasury holdings to add more physical gold to their respective holdings. With the threat of continued western sanctions and being cut-off from the USD system, emerging market gold holdings have doubled over the past decade.
Lastly, there is still room for more speculative positions even after the most recent CFTC data showed that speculators have boosted their net long on COMEX gold in recent weeks. The current net long total is just 107,000 contracts, which is 40% below levels seen when gold ran up to test $2000 at the start of the Russia/Ukraine war. Also, the current net spec long in COMEX gold is about 22% of open interest. During previous peaks, gold has seen spec length at as much as 50% of open interest.
The banking turmoil placing the Fed on a collision course between its inflation/employment mandate vs. its role of maintaining financial stability has the gold price set to close at an all-time high on a monthly/quarterly basis later today.
Gold is in the process of attempting to bullishly break out of an ascending Symmetrical Triangle consolidation chart pattern on its daily chart this morning, testing key resistance at $2000 after the core Personal Consumption Expenditure (PCE) Price Index data for February was released this morning. The Fed-favored PCE gauge shows 12-month core inflation rate dropping to 4.6%, coming in below expectations to hold steady at 4.7%.
Meanwhile, both the silver price and precious metals stocks have been leading gold higher as weakness continues to be bought since the banking crisis unfolded three weeks ago. This is a necessary ingredient for an eventual breakout to be sustained, once Gold Futures close above $2100 on a monthly basis possibly in Q2.
Although both GDX and GDXJ have become short-term overbought, the mining sector remains grossly under-owned despite the gold price threatening to breakout into blue-sky territory. During quarter-end book squaring this week, recent gold stock relative strength is evidence of funds beginning to rotate into undervalued mining stocks.
With bullion now trading at a 52-week high in relation to stocks, bonds, oil, commodities, and more importantly bank stocks, most investment portfolios have not been constructed to benefit from a rising gold price. In fact, institutional investment portfolios in totality have a small percentage of assets allocated to precious metals at less than 1%.
Just a 2-3% allocation of their assets into the relatively tiny precious metals sector, would be accompanied by soaring prices in mining stocks. By the time the marketplace begins to price in a gold price floor of $2000 per ounce, which has been strong resistance for over a decade, a speculative frenzy in junior mining stocks will not be far behind.
Before the precious metals sector comes back into favor, it is best to accumulate full positions in select quality juniors ahead of the coming herd of momentum trader's and institutional investors. With the gold price now outperforming everything that was responsible for keeping generalist investors out of this battered sector over the past decade, the largely forgotten junior complex is poised to explode higher when $2000 likely becomes a new floor in the not-too-distant future.
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.