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Hawkish central banks move gold futures down towards $1900

Commentaries & Views

Coming into this U.S. holiday shortened week, the gold price had been trading in a tight $40 range for the previous two weeks, waiting for a proper catalyst to decide its next move. The rate-hike pause by the Fed last Wednesday failed to move Gold Futures above the key $2000 level, despite a sharply sinking U.S. dollar.

Just one week after the Federal Reserve opted to skip a rate hike with inflation still well above its 2% target, all eyes were on Fed Chair Jerome Powell’s semi-annual report to Congress this week as the U.S. dollar back-tests the 102 level on the DXY. The move below 102 suggests the top is in, with the final breakdown being confirmed on a break below the key 100 level.

Powell's prepared speech during the Semiannual Monetary Policy Report to Congress on Wednesday reiterated the central bank still having a long way to go to bring inflation back down to its target. He said that although inflation has fallen sharply from last year's 40-year highs, it remains well above the central bank's 2% target. Yet, Powell provided little forward guidance to Congress as most of his statements were replicas of last week’s FOMC statement.

The Fed Chairmen said on Thursday the central bank would move interest rates at a "careful pace" from here as policymakers’ edge towards a stopping point for their historic round of monetary policy tightening. "We're at least close to where we think our destination is...and it only makes common sense to a careful pace," Powell said at a hearing before the Senate Banking Committee.

Powell’s hint of another rate-hike in July, combined with the Bank of England announcing that it has raised the Bank rate to 5%, up from 4.50%, was enough to break near-term support at $1940 in Gold Futures. And a weaker U.S. dollar, along with subsequent news from the U.S. Labor Dept stating the jobs market continues to weaken, was not enough to hold this recent gold support level.

As I type this column, technically oversold Gold Futures are attempting to hold support at $1925 as we head into the final week of Q2. There is stronger support at the $1880-$1900 region.

Critical support now underlies the Gold Futures market at $1870 and a break of that level on a quarterly closing basis next Friday would warn that a sustainable decline ahead becomes possible. But I see very low odds of support at $1880 being breached next week, with a more likely bottom being reached at $1900, which is the top of the previous breakout channel.

Despite more Fed hawk-talk this week, the rate-hike pause last Wednesday solidified my expectations for rate cuts later this year due to a combination of aggressive rate hikes, tighter lending conditions, a stagnant housing market, and yield curve inversion time-lines being consistent with recession.

Not to mention the U.S. national debt spiking $575 billion since the debt ceiling was suspended three weeks ago, to reach $32 trillion after the sarcastically named “Fiscal Responsibility Act of 2023” was signed into law last week. Debt does not matter until it does.

I expect the action by the Fed to be similar to its 2018-2020 playbook. At the Fed's last hike in the 2018 cycle on December 20th, the central bank said it planned to hike twice in 2019 which never happened. Instead, the Fed cut three times that year, with the first coming in July that resulted in a $700 rise over the next 18 months to test the long-term resistance zone at $2000-$2100 in August 2020.

Gold Futures have seen two more attempts to break out above 12-year resistance at the $2000-$2100 region after doubling in price from a significant bottom at $1045 in late 2015. The third attempt at a major resistance level is typically not successful in markets, while the gold price tends to make a false move of its real intention before a major breakout. This is how markets create the energy to swing in the opposite direction.

The most recent example was a significant bear-trap being created in late 2022 when multi-year support was breached at $1675 in Gold Futures. Once the gold price made a false move below $1675, there was a $465 move in the opposite direction from a monthly triple-bottom low at $1620 to nearly test the all-time high at $2089 in just 6-months.

The catalyst for an eventual breakout could be the 2-year Treasury yield rising above 5% - now at 4.68% and rising - triggering more U.S. bank failures. A rise in the 2-year yield to 5% during a previous rate-hike cycle triggered a global banking crisis in 2008, and a regional U.S. banking crisis during the current cycle earlier this year.

The Fed's fastest monetary policy tightening campaign since the 1980s is largely responsible for the ongoing banking crisis, which saw the collapse of four banks when the 2-year yield rose to 5% again into March, including the second and third-largest bank failures in U.S. history.

An escalation of the war in Europe in the not-too-distant future would also be a major catalyst for a major gold breakout. Mainstream media has mostly ignored reporting NATO embarking on the largest air force exercises in the alliance’s history last week.

Allied air forces wrapped up the largest deployment exercise in NATO’s history earlier today in Germany. Twenty-five nations took part in the two-week-long “Air Defender 23” exercise, with around 10,000 personnel and 250 aircraft. I certainly hope an escalation of war will not be the catalyst for a gold breakout. But the ongoing war in Europe is what it is.

Meanwhile, technically oversold miners are attempting to hold strong support at $30 in GDX and $35 in GDXJ, to form a higher low with weak, down-trending volume.

However, there is an open upside daily gap generated by the introduction of the U.S. regional banking crisis in early March at $28 in GDX that may fill if the gold price moves down to test the $1880-$1900 level before a higher-low can be established.

On the small-cap junior front, a major seller exited the sector last Friday after driving down already deeply undervalued quality juniors even lower across the board over the past few weeks. Several GDXJ and SILJ listed smaller cap juniors have been under significant downward pressure recently, despite the mining sector and the silver price trading sideways.

For the most part, the sharp declines in many of these issues were the result of internal changes made recently to both MarketVector precious metals junior listed ETFs. The new rules, linked here, are complex and a bit confusing.

Essentially, both GDXJ and SILJ will be rebalanced bi-quarterly every June and December, with the top 5 holdings now having a limit in place. The top five names will be capped at 7%, 6.5%, 6%, 5.5% and 5%, respectively, which are all major or mid-tier miners.

Although the selling in GDXJ small-cap junior positions was noticeable, the effect on the much smaller silver junior space was noticeably significant. Judging by price action & strong individual volume from last week, it appears as though the bottom 25 issues by weighting in SILJ were likely trimmed. These smaller-cap stocks are basically all the actual juniors contained in the ETF, with the rest being mid-tier or major miners.

The good news is, even after several of the juniors trimmed having strong relief bounces this week, many quality junior silver names are presenting very attractive entry points due to the forced ETF selling. One of my Top 10 positions in the Junior Miner Junky (JMJ) real-money portfolio had a stink bid filled last Friday at a support level I never expected to be met.

After junior ETF rebalances put significant pressure on this tiny sector, which was already out of favor, lower-risk opportunities have been created in quality juniors as the gold price continues to consolidate its recent six-month $465 move higher.

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.

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