Three Month Gold Consolidation in Jeopardy
As apossible near-term scenario mentioned in this column last week, the gold price has indeed been solddown to the $1300 level this week while the surging U.S. dollar has reached the92 region on the Cash Settle Index. Although the GDX has done a yoeman job ofkeeping one step ahead of both gold and U.S. equities since early February,there are clear signals the $1300 - $1365 three-month range in gold may breaklower soon.
The somewhatdovish comments from Federal Reserve Chairman Jerome Powell this week spookedgold shorts a bit, but neither the metal, nor the miners were able to sustainthe quick burst of enthusiasm from traders after the U.S. dollar popped aboveits 50-week moving average on Wednesday. The worlds reserve currency has not closedabove the 50-week average since March 2017, when it was rolling over afterhitting a multi-year high above 103 in late 2016. This 50-week line will needto continue as resistance, or the gold freefall may accelerate through $1300 soon.A weekly close above this critical resistance line may bring the 95 level intoplay.
The short-termbounce off critical support at $1300 has been underwhelming, heading into therelease of the U.S. Non-Farms Payroll (NFP) report. Although the market haspriced in a 94% chance of a quarter point hike by the Fed in June, a betterthan expected NFP could increase the possibility of fourth rate hike this year andembolden gold bears. The NFP will be issued by the time this editorial isposted on Friday morning.
Goldinvestors have become uneasy with the continued strength in the greenback andequity investors have been shunning large cap stocks for possibly the samereason. A rising dollar can be negative for U.S. large cap stocks because it makestheir exports more expensive. The buck has been getting a boost from the risingspread between U.S. Treasuries and European bond yields, while the S&P hastested its 200-day moving average for the third time since the equitycorrection began in January. Where the market closes relative to its 200-dayline today will be an important test as both the Dow and S&P have notclosed below their respective 200 day moving averages since mid-2016.
The U.S. dollarhas become over-bought, so a short-term peak in the dollar index would almostcertainly put a halt to the latest slide in the gold price. Meanwhile, the GDXneeds a close above $23 soon for gold stocks to retain their bullish uptrendsince early February. I would also like to see the silver price take the leadagain, as it did so recently before succumbing to U.S. dollar strength. Thedollar short cover rally quickly put an end to the silver short squeezerecently and the metals need silver to lead for the bulls to continue thebottoming process in the miners.
It has beenmy contention that the low has been seen in the GDX when the global equitymini-panic ended on February 9th. Nevertheless, it remains to beseen if the global miner ETF can survive the critical $21 area while seeing thepossibility of gold losing critical support at $1300. Since the 2018 low washit in equities, the miners have been receiving safe haven bids. However, thegrowing possibility of gold losing the 13 handle, due mostly to recent dollarstrength, may begin to harbor more selling in gold stocks along with margincall selling if critical resistance at the panic low in equities fails to hold.
The goldprice needs to maintain critical support above $1300, or we may see a stop runselloff down towards $1280 on this move down. If this scenario unfolds, thentrend-line support just below $1250 may come into play later on, threateningthe new gold bull which began in late 2015. Caution is advised as gold needs toclimb back above $1330 soon, or risk breaking down out of the three-monthconsolidation channel and delaying the breakout bulls have been waiting for.
By David ErfleContributing tokitco.com
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