There are the times that try Gold Bugs' souls. As the gold price continues to be hammered into the face of a parabolic U.S. dollar, the entire precious metal's complex has reached the "get me out at any price" capitulation phase to begin the second half of 2022.
With the "barbaric relic" being sold down 11 of the previous 12 trading sessions before producing a weak bounce on Thursday, a precious metal's sector analyst recently touting $2,600 gold before year-end is now predicting $1,300 during the same time-span. And yet another opined this week that gold stocks are "too dreadful to touch now," despite being grossly oversold. Simply put, uber-bullishness happens near significant tops, and uber-bearishness is generally an indication of a significant bottom being formed.
Meanwhile, it's important to consider this recent gold uber-bearishness is taking place with the gold price still nearly $100 above its sharply rising 200-week moving average at $1652. A test of this closely followed line of technical support would be a normal correction during a healthy bull market in any commodity.
As silver guru David Morgan has stated in the past, precious metal stocks will either scare you out, or wear you out. Well, the current miner correction has graced its participants with both a "wear you out" phase, followed by a "scare you out" finale that could reach its conclusion within the next few weeks.
In last weeks' missive, I pointed out reasons to expect this tiny sector having become spring-loaded for an upside reversal soon. And with the gold price sinking deeper towards critical technical support levels, gold stocks have reached historically oversold extremes this week.
On Wednesday, the GDX came within $1 of long-term support at $25, bouncing into the Non-Farm Payrolls (NFP) report issued this morning. This is a level that was strong resistance as the gold price was attempting to break out if its 6-year base below $1400. And once Gold Futures broke out of this huge base in 2019, the $25 level acted as strong support before reaching its peak at $45 in August 2020.
In the meantime, the higher-risk GDXJ is experiencing a high-velocity leg down that is coming close to the March 2020 pandemic decline, which saw the junior miner ETF move 51% lower in just 4-weeks. From its false-breakout peak in mid-April, GDXJ has declined 43% in 12-weeks, while reaching a deeper weekly oversold RSI level below 30 before bouncing on Wednesday.
As I type this missive, the Bureau of Labor Statistics said 372,000 jobs were created in June. The Non-Farm Payrolls (NFP) data significantly beat expectations as economists were forecasting job gains of around 260,000, with the unemployment rate being in line with expectations holding steady at 3.6%.
The deeply oversold gold price dipped a bit on the news, but more importantly, U.S. Treasury yields rose. As Kitco's Jim Wykoff noted this morning, the rising U.S. bond yields late this week suggest the marketplace is putting inflation worries back closer the front burner of the marketplace, and maybe on par with recession worries.
The next major catalyst for gold will likely be the June Consumer Price Index (CPI) data released next Wednesday. Although the CME FedWatch Tool is currently pricing in a 98% chance of a 75-basis point rate hike during the next FOMC meeting at the end of this month, Fed Chair Jay Powell has recently assured the marketplace of the central bank remaining "nimble" as it attempts to bring down surging inflation without placing the economy into recession.
A few days before last month's meeting, an unexpected uptick in the inflation rate and a surprise jump in the University of Michigan's survey of inflation expectations led to the biggest Fed interest-rate increase since 1994. This data had the self-proclaimed nimble Fed quickly telegraphing a 75-basis point rate hike, as opposed to the previously expected 50 bps.
The gold price sold off on the news, along with most everything else, as investors hit the sell button to build up more USD cash. But the newly nimble Fed can work both ways. The number of Americans filing new claims for unemployment benefits unexpectedly rose last week and demand for labor is slowing, with layoffs surging to a 16-month high in June as aggressive monetary policy tightening from the central bank stokes recession fears.
Additionally, the forward-looking purchasing managers data for services released this week is already showing significant declines, falling to the lowest since May 2020 in June. And one sub-index indicated a contraction in employment.
The Fed also lowered its GDP forecast for 2022 from 2.8% to 1.7% this week. Consumer sales, a highly watched figure among the Fed, is declining as are investments. Headline personal consumption expenditures are expected to spike 5.2% in 2022, up from the 4.3% estimate provided earlier.
Moreover, the Atlanta Fed slashed its forecast for Q2 GDP to represent a -1.9% contraction this week. This came after the U.S. economy shrank -1.6% in Q1, and based on most measurements, two consecutive quarters of negative growth signifies that the nation is in recessionary territory.
Oil and Dr. Copper are also swooning on concern that a recession is coming, while the yield curve inverted again this week as well. And if the CPI data next week shows signs of peaking inflation, nimble Jay Powell could begin to telegraph a 50-bps rate hike into the FOMC meeting on July 28th.
This brings us back to the historically oversold gold complex that most everyone has given up for dead, while the possibility of a Fed policy pivot grows closer with each disappointing U.S. economic data release. How long the gold stock capitulation phase will last is anyone's guess. But the lower it goes without a sustainable bounce, brings the sector closer to a sling-shot move to the upside.
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