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Gold prepares for a breakout as its safe-haven status returns

Commentaries & Views

After a waterfall decline into the first week of October, the gold price has been on an unstoppable move higher when war fears entered the marketplace last week. Despite the U.S. 10-year bond yield rising to 5%, the safe-haven metal has risen from $1825 just two weeks ago to move closer to the key $2000 level as I type this column – notching up an impressive gain of 9%, so far this month.

The gold move increased dramatically last Friday, when Gold Futures experienced a $58 advance - the largest daily move in seven years. The day began with fears of Israel appearing set to invade Gaza, followed by a significantly weaker than expected U.S. Consumer Sentiment Index reading pointing to the growing risk of stagflation. As consumer sentiment continues to drop, inflation expectations are rising with the price of oil.

Crude prices have risen since the Oct. 7 attack by Hamas on southern Israel on fears that if Iran enters the conflict, the U.S. could increase enforcement of sanctions that would curb exports and further tighten global supplies.

With both macroeconomic and geopolitical tailwinds now working in gold's favor, its explosive move higher continued this week. Conflicts in the Middle East have sent shockwaves through the global economy in the past, as the region is a crucial supplier of Energies and Natural Resources as well as a key shipping passageway.

With the Middle East home to a third of global Crude Oil supply, escalating tensions could take millions of barrels off the market during a very critical time when oil supplies have already been depleted by months of sharp production cuts by Saudi Arabia and Russia.  

Fifty years ago, and nearly to the day of last week's Hamas attack, October 6, 1973, a surprise attack on Israel sparked what became known as the Yom Kippur War. What soon followed was the Arab Oil Embargo, where over a period of a few months, oil prices tripled.

Shortly after the attack, markets topped on October 29, 1973 and by December 1973 the Dow had fallen over 21%. A severe stagflationary recession also followed, and gold more than doubled over the next several months.

This week Brent Crude Oil prices moved closer to $100 per barrel on fears of a widening war that might bring in Iran, after the country publicly threatened America a day before President Joe Biden was set to arrive in Israel.

Ayatollah Ali Khamenei’s adviser, Mohammad-Javad Larijani of the Axis of Resistance, issued a warning to America that aiding Israel “would be a strategic mistake” and would make it a “legitimate target for the resistance fighters in the entire region.” He ominously uttered that “the war will not be limited to Gaza” and said “in the near future, America’s presence in Syria and Iraq will be very costly for them.”

Meanwhile, European gas prices have already notched up a stunning gain of over 40%, the largest weekly gain on record. Iran’s foreign minister, Hossein Amirabdollahian on Wednesday called for members of the Organization of Islamic Cooperation (OIC) to stop selling oil to Israel and expel its ambassadors, hinting of a coming oil embargo ala 1973.

With growing fears of an escalation of war in the Middle East, debt is a ticking time bomb waiting to happen as the Biden Administration considers a supplemental request of about $100 billion that would include defense aid for Israel, Ukraine and Taiwan.

The U.S. can ill afford to fund three wars at once as the federal budget deficit—spending in excess of revenue—is already estimated to hit $1.7 trillion in fiscal 2023 and stay between $2 trillion to $3.5 trillion in the next three fiscal years. In fact, since the debt ceiling was suspended in June, U.S. debt is rising at $40 billion per day. And with the Federal Reserve on the brink of a major potential pivot of their exceedingly restrictive monetary policy, the U.S. will add $1 trillion in Federal debt every 45 days at the current pace.

October 1973 was a major turning-point month in the marketplace, while the eerie similarities fifty years later are piling up. In 1973 it was U.S. debt from the Vietnam War, the Yom Kippur War, the Watergate crisis after Nixon took the U.S. off the gold standard, and then the Arab oil embargo that lit a stagflationary fire under the gold price.

Today, will it be the combination of the Hamas attack, ongoing war in Ukraine, the growing divide between the left and right in the U.S., and rising global debt in the face of exponentially rising interest rates threatening to implode the monetary system to finally position gold for a breakout above $2100?

While the market ponders this disturbing scenario, silver and undervalued precious metals stocks are lagging this move higher in the gold price as the S&P 500 tests a major support line at 4250 during crash season. The Gold ETF market continues to see modest outflows as well.

After mostly exiting the market in 2013, we need institutional investors to take an interest in gold again to see a sustainable move in the miners. Over the past year or so, it has been very challenging and frustrating to accumulate a depressed and deeply undervalued sector. But I expect our persistence and patience will be rewarded when the miners begin to outperform the S&P 500.

The GDX has created a bullish inverse island reversal pattern on its daily chart, similar to the one created in the March low, while a weekly upside open gap on the gold miner ETF remains as well. Gold Futures also created an upside weekly gap at $1850 support, which could be a breakaway gap if we see follow through buying over $2000 next week.

Yet, the miners move higher reversed from stubborn resistance at $30 on Wednesday, despite the gold price moving above its downtrend line at $1960.

Unless the gold price continues with bullish momentum follow-through to a near-term breakout above $2100, the upside gap at $27 may fill if stock market panic sets in on fears of the war in the Middle East escalating further. On the upside, a move with strong volume above $33 is required to convince me of a significant miner bottom being in place.

After a few quarters of rising prices, the more aggressive equity fund managers will also have to get into the gold space, many for the first time in over a decade. And the evidence of generalists becoming defensive will eventually bring them into the higher-risk and even more depressed and undervalued junior space.

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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