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More gold consolidation required in time and price

Commentaries & Views

After the doubling of the gold price from a low of $1045 in late 2015, to a peak at $2089 by mid-2020, the safe-haven metal had reached a technically extreme overbought situation. While bullish sentiment in bullion also peaked at that time, a sideways consolidation process inside of a $450 price range has been taking place in Gold Futures for nearly three years.

Last week was the third attempt for the gold price to break out to all-time highs above $2100 during this time, while becoming extreme overbought on a weekly basis. The third attempt at a major resistance level is typically not successful. But following this latest pullback from just below $2100, I expect gold to make a fourth and successful break to new all-time highs after shaking out as many late-comers to the gold party as possible.

Gold Futures came within $4 of the mid-2020 all-time high at $2089 on May 4, then a sharp reversal last Friday hinted of more consolidation being likely during the coming weeks. Since late 2022, the gold price has been on a parabolic run of over 32% from a monthly triple-bottom low at $1620 in November. But as its price became technically overbought during Fed Week, more consolidation in both time and price is required for a coming breakout to be sustainable.

Going into next week, gold maintains a bullish bias above $1975. There is more support at $1925-$1950, with stronger support at the $1880-$1900 region. On the upside, Gold Futures have strong overhead resistance at the all-time high of $2089. A monthly close above $2100 would be a technical breakout for the gold market, with targets of $2500-$3000 in 2023.

With a Fed rate-hike pause at its upcoming mid-June FOMC meeting coming into question this week, the gold price is still waiting for a strong enough catalyst to break out of its 33-month basing pattern. And with the most aggressive Fed interest rate hike program in over 40-years likely coming to an end in the not-too-distant future, combined with an on-going global banking crisis, another potential catalyst may be on the horizon ahead of the next FOMC meeting.

The U.S. faces a June 1st deadline for a potential default when the government is expected to run out of money to pay its bills. But Republicans remain committed to spending cuts as part of raising the debt ceiling, while President Biden and Democrats argue the limit must be raised without conditions. According to U.S Treasury secretary Janet Yellen "the impact of a U.S debt default on the global economy could rival the 2008 financial crash". 

In 2011, the U.S. was in a similar situation after reaching its debt ceiling by mid-May. After a long political stand-off, legislation to raise the spending limit passed on August 1st. It was during this exact time-frame when the gold price previously reached all-time highs, while the silver price zoomed to its all-time high at $50 per ounce. 

An Oval Office meeting between Biden, House Speaker Kevin McCarthy, Senate Majority Chuck Schumer, Democratic Leader Hakeem Jeffries, and Mitch McConnell on Tuesday failed to bridge differences in debt ceiling talks. Incredibly, President Biden said he is considering invoking the 14th Amendment to work around the debt ceiling and avoid a government default without action from Congress.

"I have been considering the 14th Amendment, and the man I have enormous respect for, Larry Tribe … thinks that it would be legitimate," Biden told reporters Tuesday after the meeting with top congressional leaders from both parties failed to produce a breakthrough in the standoff.

Biden added that once the White House and lawmakers deal with the task at hand of raising the debt ceiling, he plans to look at whether the court would rule that the 14th Amendment allows the president to continue issuing debt. But by invoking the 14th Amendment there would never be a debt ceiling, which would then send us down the road to runaway inflation.

President Biden could then use executive orders to deny Congress even the opportunity to vote on any spending. Not to mention the U.S. credit downgrades which would quickly follow, along with a loss of confidence in the financial system if the world's largest economy had no limit to its government spending.

While investors are expecting a last-minute deal, as this is normally the case with these kinds of political events, there were more signs of continued gold weakness this week. After Tuesday's Consumer Price Index (CPI) release showed many essential daily necessities continue to be persistently elevated, the gold complex has begun to price in a slight possibility of another 25-basis point rate hike by the Fed in mid-June.

Although this choppy trading action for nearly three years has been frustrating to say the least for both bulls and bears, an extended base will be what fuels an eventual breakout to another likely doubling of the gold price into the mid-2020s. "The bigger the base, the higher in space" is a stock market technician's adage that was cited in a 1998 book I read by the excellent Chartered Certified Technician (CMT) Louise Yamada.

When Miss Yamada's "Market Magic: Riding the Greatest Bull Market of the Century" was written, the gold price was nearing the tail end of building a 20-year base in anticipation of the first leg in what has become a new secular bull market in gold. From 2000 through 2011, the price of gold increased every year, rising from around $250 an ounce to over $1900 per ounce. It was an unprecedented run.

Although the gold price ran up over 675% during this period, the HUI Gold Bug miner index went up over 1800%, while many junior gold stocks went up even more. There were fortunes made by contrarian speculators that began to accumulate a basket of high-risk/reward quality precious metals junior stocks, just as significantly undervalued and oversold mining space situations appeared in 2001, 2008, and 2015.

This seven-year pattern of bombed-out gold stocks created a major bottom again in Q4 2022. But despite both miner ETFs, GDX and GDXJ, having been making higher lows and higher highs since then, patience is wearing thin as volume dwindles lower due to lack of interest during each sell off.

Case in point is silver and the mining stocks beginning to show relative weakness this week, hinting of more short-to-medium term gold weakness ahead. After a 40% move up in the GDXJ from a higher-low in March, opportunities are being created for patient speculators in quality juniors as the gold price continues to consolidate its six-month $450 move higher.

In anticipation of the incredible gains the junior sector should begin to experience once the gold price prints a technical breakout above $2100, 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.