Critical Monthly Closing Levels to Watch in the Gold Complex
Since lateJuly, there has been a growing chorus of gold sector analysts calling for animminent upside explosion in the miners based generally on the highly publicized and extreme managed money short position in goldfutures. Although I happen to agree this overly large speculator short positionis a time bomb which can eventually propel most everything gold related muchhigher once they are forced to cover, it can also continue longer than most investorsbelieve possible.
If you are “backing up the truck” into the mining complex based solelyon this thesis, then you are ignoring the very reason for this sell-off whichhas been tied to the U.S. dollar becoming the safe haven of choice during the ongoingemerging market currency crisis and global trade war disputes. Until these threateningfactors begin to ease, or are addressed by the Fed with a halt to its monetarypolicy tightening, there may not be a catalyst for the record managed moneyshort position to unwind in the near-term.
Earlier thisweek, gold back-tested the $1220 region on the back of Fed chair JeromePowell’s slightly dovish opening Jackson Hole conference speech, which wasgiven last Friday morning. Since this test, bullion has retreated back downtowards critical monthly support at $1200, so I feel we will not see a shortcover rally of substance until gold can close above $1220.
However, ifthe U.S. dollar closes decisively below 95 on the Cash Settle Index on amonthly basis today, the large spec short position may begin to see somenervous short covering into the holiday weekend. Gold has been tradinginversely to the U.S. dollar since the decline began in mid-April and thesell-off began to pick up steam once the world’s reserve currency broke strongresistance at the 95 level during the second week of this month.
PresidentDonald Trump has several times in recent weeks criticized the Fed for raisinginterest rates, most recently saying in an interview with Bloomberg News on Thursday that “We are not beingaccommodated” by the Fed when it comes to trade disputes, then added “Thatbeing said ... I’m not sure the currency should be controlled by a politician.”
Nevertheless,the big question on miner investors minds remains, is this a “dead cat bounce”,or did we strike a major low in the GDX on August 15th? The bearishcase see’s the GDX and silver continuing to lead gold lower after this reliefbounce ran out of steam earlier this week. However, the volume has beendeclining after the bounce was halted at the August 15th gap in themajor miner ETF and the sector remains extremely over-sold on a weekly basis,which is a strong argument for the mid-August exhaustion low being a bottom.Either way, the monthly close today in both December gold and the GDX willprovide us with another important clue for the answer to this all-importantquestion.
The numbersto watch on a monthly closing basis are the $1200 level in December gold andthe $18.50 level on the GDX. A close below these critical points today mayusher in the continuation of the waterfalldecline in the majorminer ETF next week, when most professional traders and fund managers will beback at their desks after the Labor Day Weekend and a summertime of familyvacations. This holiday is notorious for producing major high’s in U.S.equities, and/or accelerating strong moves lower in the precious metals complex.In relation to U.S. equities, it did so in 1929 and countless other times on aseasonal basis. Since gold stocks are equities, they are not immune to sellingoff with the U.S. stock market.
Caution isstill advised and a large cash position is recommended to take advantage ofsome very good entry points, which are beginning to appear in quality juniorswith proven management teams. If you need assistance in choosing the bestprecious metal juniors to invest during this capitulation sell-off in thecomplex, stop by my website at www.juniorminerjunky.com and check out the subscription service.
By David ErfleContributing tokitco.com
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