Gold Breaking Out Amid Loss of Investor Confidence in the Fed
The newsheadlines this week, along with the rising gold price, is implying investorsacross the globe have finally accepted that inflation will continue to run hot.Despite the best efforts by central banks to convince them that surging pricesof most everything is transitory, December Gold futures are headed for their biggestweekly gain in six months. The gold price has also moved sharply above both its50-day and 200-day moving averages.
Inflationfears are returning to the fore, with China’s higher-than-expected consumer andproducer prices being the latest in a series of red flags about risks to theworld economic outlook. China’s October Consumer Price Index (CPI) climbed 1.5%compared to a year ago, exceeding market forecasts of 1.3%. Factory gateinflation climbed 13.5%, which was its highest print in 26 years.
In the U.S.,Producer Pricing Index (PPI) showed an increase of 8.6% YoY on Tuesday, as theenergy percentage changed by 30% over a 12-month period. And although the ConsumerPrice Index (CPI) released the following day was predicted to rise 0.6% fromSeptember and to 5.9% year-over-year, the numbers for October in the world’slargest economy came in at 0.9% and a whopping 6.2% increase year onyear.
Amid thereaction to the U.S. CPI data this week being the highest in over three decades,the gold price managed a headline grabbing technical breakout above keyresistance at $1835 as real yields tumbled to fresh record lows.
After lastmonth’s inflation data exceeded expectations, gold was pressured by investorsfearing the Fed raising interest rates sooner than previously anticipated totame inflation. Higher interest rates tend to dampen demand for gold, which isa zero-yielding asset.
However, sincethe Fed continued its “inflation is transitory” mantra during the FOMC meetinglast week, markets are finally beginning to realize the world’s largest centralbank is between a rock and a hard place regarding monetary policy. The Fed“using its tools” has been unable to bring inflation down without reachingmaximum employment, and the economy is unable to reach maximum employment underPresident Biden’s authoritarian mandates.
Not onlyhave investors begun to lose faith in the Fed’s monetary policy, several FederalReserve members are fleeing the central bank. Two Fed presidents resigned in September amid ethical controversy, and Randal Quarles announced this week that he also plans to resign fromthe Federal Reserve’s Board of Governors when his four-year term expires at theend of the year. Another position remains vacant as well, with a third positionfor the central bank opening up in January when Vice Chair Richard Clarida’sterm expires.
Moreover, aninvestigation into potential insider trading among Fedmembers may beenough to bring an end to Jerome Powell’s tenure as Chairman when his term endsin February of 2022. Rumors are swirling that President Biden may appoint LaelBrainard, as she is the only Democrat on the seven-member board.
Therefore,there is the potential for three to four Board of Governor slots becomingavailable in the near future. Democrat candidate favored changes would give theBiden Administration the ability to tip the scales in their favor, despite theFed claiming to be independent from the government.
Meanwhile, froma technical perspective, things are lining up well for buyers to potentially takeDecember Gold futures towards the $1,900 level next and retest the June high at$1,920 in the near-term. There are two encouraging signs this latest breakoutwill not be a “fake out” like multiple moves previously during a 15-month goldprice consolidation process.
One is thatprice is breaking higher out of a bullish technical pattern, combined with theconvergence of ongoing bullish macro fundamentals. After being coiled up in anarrow $100 range for several months now, the sharp move above key resistanceat $1835 has caught the attention of momentum traders betting on the technicalbreak moving higher. The other is that gold continued its bullish momentum androse for the sixth consecutive session on Thursday, despite the renewedstrength in the U.S. dollar breaking out to a 16-month high.
Since thelast trading session of Q3, I have been documenting strong hints in this weeklycolumn that asignificant bottom has been in the process of being formed in the gold stockcomplex.
During thelast week of September, global miners Agnico Eagle Mines Ltd (AEM) and KirklandLake Gold (KL) announced that they have agreed on a merger of equals, with the combined company tocontinue under the former’s name. In my October 1st column, I stated that this high-profiledeal announcement could trigger more M&A activity, along with beinginstrumental in creating another significant bottom in the mining space.
Once the mergerwas announced, a handful of deals have followed in the mining complex over the past severalweeks, with single-asset producers being the focus of recent acquisitions. Themost significant being this Monday’s announcement of Australia’s Newcrest Mining(NCM.TO) entering into an agreement to acquire all outstanding common shares ofPretium Resources (PVG.TO) it does not already own in a deal that values theCanadian miner at $2.8 billion.
Both the GDX& GDXJ, along with the silver price, are beginning to breakout of theirrespective 4-month inverted head & shoulder bottomformations this week.Additionally, junior precious metal miners have been outperforming the seniors,reflected by the GDXJ/GDX ratio moving higher since Q4began. Once we see a weekly close above $47 in GDXJ, I expect thehigher-risk developer/exploration juniors to begin out-performing the mining sector.
The Junior Miner Junky service provides complete transparency into my tradingactivities and teaches investors how to navigate this high-risk/high-rewardsector. Subscribers are provided a carefully thought-out rationale for buyingindividual stocks, as well as an equally calculated exit strategy. If yourequire assistance in accumulating a basket of undervalued junior M&Acandidates, and would like to receive my research, newsletter, portfolio, watchlist, and trade alerts, please click here for instant access.
By David ErfleContributing tokitco.com
Follow @KitcoNewsNOW
newsfeedback@kitco.comwww.juniorminerjunky.com