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Gold Futures Move Towards Key $1900 Support into Jackson Hole

Commentaries & Views

After continued U.S. economic strength announced this week, the likelihood of another Fed rate hike by November moving closer to 50% has taken Gold Futures closer to key technical support at $1900. Traders assign a 45% chance of a November rate hike, after an expected pause in September. One week ago, those odds of a November hike were less than 30%. 

Minutes from the July FOMC meeting released on Wednesday showed that "a couple of participants" wanted to leave rates unchanged and stated that risks have become more two sided, which underlines that it will be up to the last round of economic data if there is another hike in September or not.

A further rise in yields and the U. S. dollar would be a headwind for gold that can send gold prices still lower. With Gold Futures appearing set to test its rising 200-day moving average just above $1900 soon, the DXY has already reached its falling 200-dma just above 103. 

If USD momentum can stay overbought, while price breaks above the 200-dma and this down trendline becomes support, a move to 105.5 becomes the probability with Gold Futures possibly moving towards longer-term support at $1850. 

Seasonally, gold has a strong period in the second half of August attributed to physical demand. Over the last 15 years, gold has risen 73% of the time between August 16 and September 2. Heading into this morning, December Gold has been down 12 of the 13 August sessions and is due for a bounce.

Furthermore, if the U.S. economy starts to show acerbating signs of slowing down, the bid could come back into bonds, and that could once again assist gold higher, especially if the market starts to sense the prospect of a Fed cut next year.

The main risk to be aware of next week is a continuation of the ‘higher rates for longer’ interest rate narrative from Federal Reserve Chairman Jerome Powell speaking from the FOMC Jackson Hole Symposium on Friday morning. Each year, FOMC officials gather at their summer retreat in Jackson Hole, Wyoming for a symposium in late August to exchange views on monetary policy and economic trends.

Although this is mostly an academic event, the meeting has been used by Fed leaders over the years to signal major strategy shifts. Last year, Chairman Powell used this venue to declare that his Federal Reserve will continue raising interest rates with urgency to fight rampant inflation.

The Fed Chairman was trying to send the message that the tightening cycle was just beginning. What followed was a powerful rally in U.S. yields, which turbocharged the dollar and slammed stocks. But the economic landscape is very different this year.

Inflation has moderated, although much of the improvement has been attributed to declines in energy prices. Core inflation is still burning hot and since the labor market remains extremely tight, there are concerns inflation might not return to its 2% target anytime soon. 

Although there has been serious progress on the inflation front, it is probably too early for the Fed chairman to take a victory lap and declare “mission accomplished.” Powell’s comments could also have a disproportionate impact, given that U.S. yields are trading near their highest levels for this cycle. Jackson Hole can be the catalyst for a break higher, or a rejection, driving the U.S. dollar and gold accordingly. 

Meanwhile, massively undervalued juniors were sold off more aggressively this week, while the massively overvalued stock market has been rolling over since a likely peak in late July. The S&P 500 is already down over 5% this month. In fact, the index has basically wiped out all its summer gains, closing this week at its lowest level since June 26.

Although this is what we need to see to attract generalist investors back into the mining space as a safe-haven, we cannot rule out further risk to the downside in the form of a panic selloff in equities during "crash season." A Fall market crash could be precipitated by a worsening banking crisis as a result of persistent relatively high interest rates. If so, the move could set up a test of the September 2022 lows in both GDX & GDXJ.

Historically, the August-September period ushered in the annual high, or the annual low, in each of the past eight years after gold stocks formed a significant bottom in August-September 2015. Once Phase Two of the secular bull market in gold began in late 2015, a significant bottom was carved out in GDX after an 85% decline at the same time.

Subsequently, the August-September period marked a high for the year in 2016 and 2017, the low for the year in 2018, the high for the year in 2019 and 2020, and the low for the year in 2021 and 2022. This 12-month cycle low in GDX could be carved out at any time over the next few weeks. But to set up the higher probability of an ensuing rally, the global miner ETF ideally would move higher after the March 2023 low at $26.50 has been tested, or breached. 

We will probably experience a bit more pain in gold stocks during the last few weeks of summer doldrums, but are likely close to a significant bottom in the mining space. Fed Chairman Jerome Powell's Jackson Hole speech next Friday could either accelerate the decline for a near-term upside reversal, or set the final low.

With two more weeks of summer doldrums remaining, what little news reported during August is mostly being used by investors as liquidity events to sell underperforming juniors for tax-loss regardless of content or stock valuations. Many quality juniors have had long-term support lines being threatened, or broken, this week while becoming deeply oversold with mostly lower volume.

With junior sentiment the lowest we have experienced since the major bottom carved out in late 2015, the recent selloff has created a lower-risk opportunity to accumulate positions in a basket of quality issues trading at rock-bottom prices.

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.