After an unprecedented run of seven consecutive monthly losses in Gold Futures, November has begun with a strong two-week upside reversal of $170 amid growing expectations that the Fed is edging closer to a potential “pivot” away from aggressive interest rate hikes. Gold hit approximately $1620 for the third time at the beginning of November, printing a “triple-bottom” which marked the end of the multi-month correction and the beginning of a rally.
Last week's lower-than-expected Consumer Price Inflation (CPI) data increased the rally in gold, as the U.S. dollar sank below key technical support at 109 in the DXY. With the recent parabolic rise in the world’s reserve currency being bullion’s strongest headwind during a sharp decline from its March high, it is no coincidence that the greenback peaked on the same day gold made its late September low.
The gold space received a further boost Tuesday after the Producer Price Index (PPI), a key measure of inflation at the wholesale level, rose 8% in October compared to an 8.4% increase in September. This further cementing of the Fed likely raising interest rates another 50 basis-points next month, as opposed to the previously expected 75 bps, was enough to take both gold and silver to strong resistance levels.
Once the gold price became short-term overbought by nearly reaching the key $1800 Tuesday morning, with equally overbought silver backing off from formerly strong support at $22, some healthy profit taking has been taking place. If the current correction results in a higher low than the last low, we would get technical confirmation that the multi-month correction has indeed concluded.
Since March, the Federal Reserve has been aggressively raising interest rates in hopes of bringing down inflation, creating a strong headwind for the gold price. The world’s most powerful central bank has increased its benchmark borrowing rate six times for a total of 3.75%, including four straight 75 basis point rate hikes.
Following this week’s inflation data, the marketplace continues to price in a possibility that the Fed will only hike rates by 50 basis points in mid-December. The CME FedWatch Tool shows an 80% chance of a 50 bps hike, while also showing that the Fed will downshift its pace of rate hikes even further to 25 basis point increases by the first-half of 2023.
Federal Reserve Vice Chairman Lael Brainard shares this view as well, saying on Tuesday that “if the economic data continues to show inflation is on the decline, then the central bank could scale back the extent of its future rate hikes.”
Another former gold price headwind also broke down recently in spectacular fashion when Crypto exchange FTX and many of its affiliated companies filed for Chapter 11 bankruptcy last Friday, with liabilities reportedly being up to $50 billion. As one would expect, FTX Founder Sam Bankman-Fried (SBF) stepped down as CEO.
Just last August, SBF was living the high-life in his Bahamas mansion, he is now attempting to sell for $40M, while being touted as the next Warren Buffett by Fortune magazine. When the article was written just three months ago, SBF’s net-worth was north of $26 billion and FTX $32 billion.
However, once investors caught on to the fact that SBF was running one of the biggest Ponzi scheme in history through FTX, now the former billionaire and discredited Wunderkind may not even be a lowly millionaire much longer. When the legal fees come due from the massive fallout that is now just beginning to take place in the once touted “safe-haven” crypto space, Bankman-Fried could very well end up completely broke and in prison.
The FTX collapse has been a gut punch to both uber-rich and lower middle-class investors, making this scam far worse than the Bernie Madoff pyramid scheme exposed in 2008 that ripped off mostly celebrity millionaires. The FTX debacle includes 20 billionaires who were conned by SBF, alongside countless blue-collar investors and became the catalyst that shaved off more than $250 billion from the crypto market in just 48 hours.
This total collapse of the formerly second largest crypto exchange spearheaded a panic wave of selling that has taken the total capitalization of the sector down to $781 billion from what was once over $3 trillion in November 2021. And as a result, Bitcoin, Ethereum, and altcoins faced a massive sell-off and risk further drawdown as crypto scandals have merged into contagion, just as gold began its sharp climb.
The breakdown of multi-month trading ranges last week by Bitcoin (BTC) coincided with the bear-trap reversal continuing in gold, hinting of sector rotation. After being locked in a sideways trading range since June, the breakdown last week by BTC below an important technical support level near $18,500 confirms a new intermediate-term downtrend is in play. The move suggests its next downside technical target on BTC to be 12,000.
Meanwhile, there are a few other tailwinds besides the Fed possibly moving slower on rate hikes, along with Bitcoin sector rotation, that have recently come into the gold picture. The outflows on the Comex of physical silver since February 2021 have been significant, while into just the third quarter of 2022, central banks worldwide have purchased more gold than any other quarter since 1967.
Should this trend continue at the same pace, the Comex will be drained by late March 2023 of available physical silver. That is only five months’ away with traditionally strong demand months upcoming. And central bank buying in the third quarter far exceeded the previous quarterly record in data stretching back to 2000, just before gold price began a 6x move into 2011.
After reaching their respective upper weekly Bollinger Band resistance lines in rapid fashion with strong volume last week at $28.50 in GDX, and $35 in GDXJ, a much lower volume profit taking correction in the mining space is taking place this week. The move lower from these short-term overbought levels in gold stocks is giving investors an opportunity to get into deeply depressed quality juniors at lower prices before the precious metals rally resumes.
The gold complex has been basing since August, and the sharp move higher out of this base last week is just in time for the period of positive seasonality in precious metals that lasts into the spring. When combined with market perception and sentiment now assuming a more dovish Fed and inflation still at an extremely high rate, along with the implosion of the formerly perceived safe-haven crypto space, this is the perfect environment for the gold complex to begin its next up-leg.
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