After ending an unprecedented seven-month losing streak by rising over 7% in November, gold began December with its largest one-day gain in two years. And since its triple bottom at $1620 in late October, Gold Futures on Thursday closed just $17 from where it began 2022 at $1833, outperforming the stock market by a wide margin this year.
Not bad for a metal which the Wall Street Journal declared on the front page of its September 22 issue as having “lost its status as a haven.” Two days later gold fell to $1629, the lowest daily close in more than two years. But the declaration became a case of yet another mainstream media cover-story contrarian signal of a major trend change in gold, beginning an ascent in the metal which has continued into the final month of a tumultuous year on Wall Street.
Gold futures rose $55, or 3.1%, to settle at $1,815 an ounce on the Comex to begin December, buoyed by weakness in the U.S. dollar and Treasury yields after Federal Reserve Chairman Jerome Powell indicated that policy makers may deliver a smaller rate increase later this month.
With recent data suggesting that inflation may have peaked, Powell sent a crystal-clear message to the marketplace during a speech on Wednesday — the central bank does not want to overtighten and then be forced to cut rates too soon.
“I don't want to overtighten. Cutting rates is not something we want to do soon. So that's why we're slowing down and we are going to try to find our way to what that right level is,” Powell said when answering questions after his speech at the Brookings Institution.
Powell's remarks confirmed that the Fed’s most aggressive rate-hike program in 40 years was slowing down as far as December-meeting expectations are concerned, setting the stage for gold to move up from a bullish 3-week flagging pattern during the following Comex trading session.
Further supporting bets around slower rate hikes, PCE data released Thursday morning showed moderation in the inflation trend last month, boosting interest in the safe-haven metal. Once a 3-week bearish flagging pattern in the DXY broke key support at 105, a sinking U.S. dollar took the gold prince into a key overhead resistance zone at $1800-$1825, and silver well above $22.
After bottoming together in late September, mining stocks and the silver price were anticipating the recent move in gold by consistently showing relative strength. But with strong overhead resistance being met on Thursday in both the metals and its miners, gold stock gains were muted in relation to the outsized 3% move up in Gold Futures.
The miners often lead the metal’s price in both directions. Conversely, gold stocks began to show relative weakness on Thursday as both GDX and GDXJ reached key resistance levels at $30 and $37, respectively. After moving up 40% during the past few months, the miners may now be due for a consolidation of recent out-sized gains.
As mentioned in this space a few weeks prior to a significant bottom being reached on September 26, gold stocks seven-year bottoming cycle was indeed imminent. And after each previous major bottom during this secular gold bull market, which began at the turn of the century, an out-sized triple-digit mining sector move has followed shortly thereafter.
In 2016, the GDXJ began the year by zooming nearly 300% from an accumulative bottom in just 6 months. Once the 2016 up-leg peaked mid-year, the consolidation of those out-sized gains ended with an indecision monthly candle low 26 months later in September 2018 at the $25 region. The gold price was trading at $1250 per ounce when this low was struck.
A more recent move in the junior miner ETF from March to August 2020 took just 4.8 months to complete after moving up roughly the same staggering amount from a pandemic induced spike low. In similar fashion, once the 2020 up-leg peaked mid-year, the consolidation of those out-sized gains ended with an indecision monthly candle low 26 months later in September of this year, also at the $25 region.
Only the gold price was trading at $1650 per ounce this September, presenting a lower-risk opportunity for contrarian investors to buy and hold a basket of quality juniors for the duration of a new mining cycle which has likely just begun.
The fuse has now been lit in the precious metals junior space, with each quality junior that has yet to join the party likely doing so once tax-loss selling has been completed by retail investors. Although we have seen double-digit moves higher in many of the best in breed junior developers and explorers since the September low, most still have quite a bit of catching up to do.
The recent capitulation selling of quality junior babies being thrown out with the life-style junior bathwater has created one of the most extreme value disconnects seen in years. Once momentum traders and funds come back into the sector on a GDXJ breakout above $42, quality micro and small cap juniors will begin to outperform the miners.
In the meantime, the gold stock complex has become short-term overbought and will likely create lower-risk buying opportunities in quality juniors soon. Before this tiny sector comes back into favor, it is best to accumulate full positions in select juniors on weakness ahead of the coming herd of momentum traders.
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