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Gold futures are building a new floor at $1900

Commentaries & Views

After an introduction to a U.S. regional banking crisis in March took the gold price from just above $1800 to over $2000, Gold Futures have been consolidating those outsized gains by carving out a bullish flagging pattern between $1900 and $2000 for the past five months.

On Thursday, Gold Futures closed above $1900 on a monthly basis for a sixth consecutive month, creating a strong base ahead of its fourth and what I expect to be successful attempt at a long-awaited breakout above $2100 in the not-too-distant future. 

The safe-haven metal has held up well as an alternative currency at a time when the U.S. dollar is vulnerable to debasement from inflation and ballooning deficit-financed spending. The Federal Reserve has raised interest rates several times this year to combat inflation. But the torrid pace of inflation has persisted, creating financial pressure on millions of U.S. households.

Elevated inflation pressures have forced the Fed to maintain a hawkish bias, however, there is a growing risk that the central bank will be forced to end its tightening cycle before inflation is bought down to its target 2% range. Currently, the Fed’s key interest rate is within a range of 5.25%-5.5%, the highest level in more than 22 years.

The relentless rate-hike campaign by the U.S. Federal Reserve may have already started to work against the U.S. dollar as the world's most powerful central bank potentially pushes the economy closer to a recession.  

With U.S Treasury bond yields showing signs of topping, along with the U.S. dollar, economic data released this week has lowered expectations of further interest rate hikes. Since the secular gold bull market began at the turn of the century, peaks in rate-hike cycles have preceded major gold price up-legs.

Going into the U.S. three-day Labor Day holiday weekend, markets see a strong chance that rates have peaked. Even if the Fed delivers another one or two quarter-point increases after an expected pause later this month, traders are convinced the aggressive tightening campaign is pretty much finished.

The Personal Consumption Expenditures (PCE) Price Index released on Thursday showed cracks are starting to appear in the economy as personal income came in weaker than expected. The report said that personal income rose 0.2% last month, while economists were expecting to see a 0.3% rise.

Although PCE inflation in the U.S. rose to 3.3% on a yearly basis in July from 3% in June, the current pace of the increase reported in consumer spending is unlikely sustainable. Households are drawing down excess savings accumulated during the COVID-19 pandemic.

Student debt repayments also resume in October for millions of Americans and higher borrowing costs could make it harder for consumers to keep using credit cards to fund purchases. JP Morgan recently reported household excess savings already being exhausted, and estimates that household liquidity will be exhausted by May 2024. 

PCE report Data indicated that the savings rate fell by 3.5% as well, the lowest since November 2022, meaning the outlook for consumer spending is less robust. The saving rate was at 4.3% in June. 

Even though GDP data earlier this week indicated that the U.S. economy is on firm footing, the consumer confidence index declined sharply to 106.1 in August, down from July's downwardly revised reading of 114. "Although consumer fears of an impending recession continued to recede, we still anticipate one is likely before year end," the report said.

The recent ISM manufacturing PMI also came in below 50 (i.e. activity was declining) for a ninth straight month in July and industrial production contracted in May, June and July. The services side of the economy is holding up, but bank lending standards are being tightened and with interest rates on loans now much higher, consumer spending is likely to slow.

If consumer spending shrinks, a recession becomes almost inevitable and that would result in falling bond yields, interest rate cuts, declining real interest rates and a weaker dollar. A scenario which would provide plenty of fuel to sustain a breakout in gold above $2100.

When combined with continued eastern central bank buying, increasing consumer demand could play a critical role in getting the gold price back above $2000 before the new year. Recent Chinese stimulus measures to support the nation's economy has already sparked healthy physical demand from Asia. If the Chinese economy gets back on track, then we are going see a significant increase in gold jewelry demand.

With the summer doldrums ending, activity in the gold market is expected to pick up in the next few weeks as consumers return to the physical market ahead of important holidays and festivals in India as well. Gold jewelry and bullion are traditionally bought before the Diwali festival in November and given as gifts. Following Diwali is the start of India's wedding season, another period of solid consumer gold demand.

Meanwhile, gold stocks are continuing to move higher from the depths of their recent despair this week. The highly anticipated U.S. Non-Farms Payroll (NFP) report this morning showed new hires totaling less than 200,000 for the third month in a row, adding to mounting evidence of a cooling labor market. The unemployment rate also jumped to 3.8% from 3.5%, marking the highest level in a year and a half.

As I type this column, both GDX and GDXJ are attempting to move back above their respective rising 50-week moving averages, which have recently become initial resistance. A weekly close back above these former strong support levels later today at $29.50 and $36, respectively, would give more credibility to a higher-low being set in the mining space.

Historically, the August-September period ushered in the annual high, or the annual low, in each of the past eight years after the GDX 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 the global gold miner ETF 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 may already be in place.

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.

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