Make Kitco Your Homepage

Gold positioning for a breakout after bottoming in June

Commentaries & Views

With most investors having given up on the ancient metal of Kings during summer doldrums, the gold bull is positioning for an historic breakout with very few riders left on board. This is par for gold’s course, as historically, the safe-haven metal has a habit of ditching as many investors as possible before its next major up-leg begins.

For over three years now Gold Futures have traded in a range between $1620 per ounce and the all-time high of $2089, creating a strong base while frustrating both bulls and bears. Gold has tested this high three times, but failed each time. In 2020, gold rose after the COVID outbreak triggered a massive fiscal and monetary response from central banks to become extreme overbought after doubling in four years.

After a 17-month consolidation, gold retested the high in 2022 during the Russian invasion of Ukraine but fell back again as the war remained isolated. The high was tested for a third time in 2023 during the U.S. regional banking crisis, then pulled back recently on Fed rate-hike fears.

The third attempt at a major long-term resistance level is typically not successful in markets. But following this latest pullback from a 12-year resistance zone of $2000 to $2100, I expect gold to make a fourth and successful break to new all-time highs within the coming weeks after shaking out as many late-comers to the gold party as possible.

With most retail investors following mainstream financial news, gold has historically made major bottoms after headlines regarding its relevance have been splashed across front pages. In September 2022, while the gold price was bottoming at $1620, a Wall Street Journal headline stated “Gold Loses Status as Haven.” Gold Futures promptly moved up $465 to within $4 of its all-time high of $2089 over the next six months.

After a 9-week correction of this move from the bear-trap low in November, a textbook 38.2 Fibonacci retracement of the move to test the $1900 level was experienced into the end of Q2. And on June 28, the day before $1900 was reached, a Bloomberg headline boasted “Gold is No Longer a Hedge Against Bad Times.”

Yet, the recent bottom in gold from this key level has been forming due in part to “bad times” being on the rise again with the Ukraine war at risk of escalation. Based on quantified measures of geopolitical risk, the latest reading of the Geopolitical Risk Index (GPR) for the month of June 2023 has started to tick up to its highest level in eight months.

The GPR is compiled by U.S. Federal Reserve economists Dario Caldara and Matteo lacoviello and measures the social mood of impactful geopolitical events, threats, and conflicts since 1985 by counting the keywords used in the press.

Gold is also shrugging off higher bond yields, as they have had little impact on the U.S. dollar. The greenback slumped to its lowest since April 2022 Thursday, sharply moving below long-term support at 100 on the DXY for an over 3% loss in just a week. The move below this critical level suggests a major top is now in place on the world’s reserve currency, which is headed for its biggest weekly slide so far in 2023.

Furthermore, gold is also starting to attract some investor attention after state-run RT reported the Russian government confirmed that BRICS nations Brazil, Russia, India, China, and South Africa plan to introduce a new trading currency backed by gold last week. This is the latest evolution of the ongoing de-dollarization trend that has prompted central banks to buy bullion at an unprecedented pace.

Into the close of H1 2023, Gold Futures also held firm above $1900 despite major central banks around the world surprising markets in June by delivering the highest number of interest rate hikes seen so far this year.  Out of the nine central banks overseeing the most heavily traded currencies, seven raised rates, two kept them unchanged, and only one reduced interest rates. The total number of rate hikes in June reached 225 basis points, following six hikes in May.

In 2023, G10 central banks have now implemented a total of 29 rate hikes, amounting to 975 basis points. Since the start of the rate hiking cycle in September 2021, major central banks have raised interest rates by a cumulative total of 3,790 basis points, yet the gold price is $150 higher from Q4 2021.

Meanwhile, the latest U.S. Consumer Price Index (CPI) print on inflation came in well below prior numbers and a bit softer than most economists expected on Wednesday. And despite another 25-basis point hike in less than two weeks by the Fed still being over 90% priced in, the gold price zoomed above initial resistance at $1950 mid-week which was recently strong support.

After Gold Futures printed back-to-back bullish weekly hammers coming into Q3, both silver and the precious metal miners have also begun to show relative strength to gold. Silver and mining stocks generally lead the gold price in both directions. As the gold price was in the process creating a major low into Q4 2022, both silver and the miners began to show relative strength from what eventually became a significant bottom.

The closely watched gold/silver ratio has bullishly trended lower since the $1900 Gold Futures low in late June, while the silver price bottomed a week before gold. On Thursday, a move below 80 took place in this important statistic, and a sustained move below this key level will bring more generalist investors and momentum traders back into the gold space.

After both GDX and GDXJ closed above strong support levels at $30 and $35, respectively, on a monthly and quarterly basis in June, the miners have likely put in another higher low. And the sharp move higher in the miners this week is with rising volume, showing momentum jumping into this market.

But even though both ETFs are still up 40%+ from their September 2022 lows, most quality high-risk small and micro-cap juniors have yet to catch up with the miners and remain deep-value speculations at lower-risk prices.

Despite Gold Futures threatening to break out from a major-bullish 12-year cup & handle pattern above $2100, the previous three failed breakouts have damaged investor sentiment towards the precious metals complex. And after a significant 7-year bottom in gold stocks was reached in September of 2022, the Gold Bull has done everything in its power to successfully shake off as many riders as possible before doing so.

This niche sector has historically turned up violently during times of extreme negative sentiment, accompanied by a lack of interest from sector professionals and generalists alike, which describes the current climate. When I discovered the gold complex in the early 2000s, junior gold stocks were hated, ignored, and forgotten like they are today, and this proved to be a generational buying opportunity then, as it is now.

In mid-June, the Junior Miner Junky (JMJ) newsletter completed a concentrated portfolio of 21 exceptional junior resource stocks with 3x-10x upside potential in anticipation of a Gold Futures breakout above $2100 at some point in Q3 2023.

The weekly newsletter provides complete transparency into my trading activities generated from the high net-worth real-money JMJ Portfolio. The service also teaches its members how to navigate this high-risk/high-reward sector successfully over the course of a 7-year mining cycle, which has recently begun.

JMJ Subscribers are provided a carefully thought-out rationale for buying individual stocks, as well as an equally calculated exit strategy. 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.