Gold Poised to Continue Higher into Chinese New Year
With some profit taking on tap when gold’s 6-week rally paused fora bit last week, the GDX has been sold down to strong support at the $23 level.The major miner ETF move up from its mid-December low was stopped cold justbefore it could reach long-term resistance at the $25 region, when it had astrong volume intra-day reversal from this critical level on January 25th.
Since then,the miner price action leading into Federal Reserve Chairwoman Janet Yellen’sfarewell FOMC speech and this morning’s release of the US Non-Farms Payroll(NFP) report should not be surprising to veteran miner sector investors.Virtually every FOMC meeting and NFP report during this US interest rate hikecycle beginning in late 2015, has been sold into by precious metal investorsand computer-based trades. The gold sector continues to be sold into thesereports despite the fact that gold has risen during each Fed FundsRate-hike cycle since Bretton Woods collapsed in 1971, when President Richard Nixon severed thelink between the dollar and gold.
Due to thedouble whammy of both an FOMC meeting and the NFP report being released duringthe same week, gold stocks have been hit particularly hard this week.Nonetheless, gold has a tendency to rise shortly after the US NFP has beenreleased during this rate-hike cycle, as algorithm based selling is met withvalue investor buying in the quality miners.
Even thoughthe slumping US dollar was over-sold going into the FOMC meeting this week, theFed basically guaranteeing another rate-hike at the upcoming March 20-21conference was unable to bring any long-term buying into the greenback. This isvery bullish for gold and as I type this missive on Thursday evening, the buckhas closed at 88.50 support on the Cash Settle Index. On a technical basis, if thislevel is substantially breached, we could easily see a further decline of 2 to3% in the short-term which would take the index to the next support level inthe 85 region.
The goldrise since mid-December has coincided with the US dollar’s freefall that beganjust after the Fed raised interest rates for the fifth time since the rate-hikecycle began in December of 2015. If, in fact, the U.S. dollar does break below the criticalsupport level at 88.50 and quickly falls down to the 85 area, we could easilysee gold prices gain 2 to 3% which would take the spot price to just about$1400 per ounce. The miners have been lagging since the aforementionedintra-day reversal in the GDX and could easily test long-term resistance at $25-$26level to catch-up with the gold price if this scenario unfolds.
Meanwhile,the yellow metal has been consolidating above strong support at the $1330 area,which has seen steady buying come in whenever the spot price has been sold downnear this level. The late January to mid-February time-frame has beenseasonally bullish for gold as solid Chinese New Year demand heats up leadinginto “Golden Week”, which begins on February 15th. With continuousbuying coming in from China, combined with a continually weak US dollar, I amlooking for gold to possibly challenge the $1400 region and the GDX tosimultaneously challenge the $25-$26 area leading into Valentine’s Day.
However, ifthis scenario unfolds going forward, I would also expect a correction to beginwhile the Shanghai gold exchange is closed for Golden Week in mid-February and possiblycontinue into the March 20-21 FOMC meeting. This would be healthy action, whileworking off a short-term overbought situation before gold and the GDX canfinally breach these long-term resistance levels on a monthly basis and beginto move significantly higher later this year. On the other hand, if the $1300level is breached in gold, then I would be looking for long-term criticalsupport in the GDX at the $21 level to be tested and the now 18-monthconsolidation in gold stocks to possibly continue into Q3 of this year.
On aside-note, in mid-December I stated the following in this column: “I would not be surprised to see agold bottom coincide with a significant top in the full-blown speculative maniathat bitcoin has obviously become.” I have received quite a bit of hate mailfor my outspoken comments on bitcoin, even though this statement may verywell have already been proven correct. The last low in the gold price was onDecember 12th, when the spot price hit $1238 and the bitcoin top wason December 16th, when the cryptocurrency nearly reached $20,000.The chart has since formed a nasty head & shoulders top and is currently trading well below$10,000, as governments place new restrictions on the cryptocurrency and many businesses have ceased to acceptpayment in bitcoin.
By David ErfleContributing tokitco.com
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