Gold Remains Firm Despite Stronger U.S. Dollar
When gold’slatest Commitment of Traders (CoT) report was released last Friday, we learnedspeculators boosted their net-short position in bullion futures and options tothe largest level since at least 2006 in the week ended Oct. 9th.During the previous session on October 11th, gold posted the biggestdaily rise since the Brexit vote as a surge in safe- haven demand saw managedmoney speculators begin to cover this extremely large short position.
We will knowhow much of the speculative short position has been covered, up until October16th, when the latest CoT report is released later today at 3:30pm EST.Commercial traders, known as the “smart money”, have been net-long for fiveconsecutive weeks, so it remains to be seen if they continue to be net-long untillater this afternoon.
Bullion hasdeclined every month since April but appears to be forming a medium-term bottom.Furthermore, even though the U.S. dollar turned higher on the back of hawkishFed minutes on Wednesday and a weakening euro, gold has remained firm this week.The world’s reserve currency has also formed a bullish inverse head &shoulders bottoming pattern on thedaily Cash Settle Index, not unlike both the GDX and the GDX/GLDratio.
Moreover, safe-havendemand from investors is beginning to firm up bullion and the U.S. dollar intandem. In fact, the correlation between the greenback and the gold complex hasweakened in recent weeks, while investors have begun to flee equities. If thiscontinues, it bodes well for gold stocks and signals both the U.S. dollar andthe gold sector are now attracting safe-haven bids. During gold’s brutalsix-month selloff into mid-August, the biggest argument from the bear camp was therise of the U.S. dollar being the main reason for investors selling the goldcomplex.
However, duemostly to its industrial component, silver continues to lag both gold and itsminers while bullion has been bottoming and global equities are correcting.Although both silver and SIL,the Global Silver Miner ETF, has formed an inverse head & shoulders patternalong with the gold complex on the daily chart, the neckline has not beenbroken on either pattern and both have begun to roll over this week.
Meanwhile, the Gold/Silverratio has been rising toward 85, which has been strong resistanceduring this selloff in the complex and if broken, could spell more trouble for theprecious metals sector in the near-term. Silver generally leads gold out ofmajor bottoms being made in the precious metals complex and it would bebeneficial to the gold sector if this ratio began to head lower.
Additionally,the majority of junior resource stocks continue to be hit with tax-loss selling.Investors have been using most company news releases as liquidity events todump losing positions, regardless of individual company fundamentals. Althoughtax-loss sales began early this year, selling generally peaks and the juniorsector reaches a seasonal low in mid-December. Nevertheless, I believe eachrespective quality junior being sold down will bottom independently once thelast tax-loss seller has sold, making this is an ideal time to accumulatelow-priced positions in good companies for contrarian speculators.
Technically,we had a weekly close in December Gold above $1211 last Friday, so amedium-term bottom may have been struck. However, a close today above $1229would make a stronger case for a bottom being in place as we head intoNovember. I am expecting increased volatility in the gold sector during theU.S. mid-term elections on November 6th, followed by the next FOMCmeeting on November 7 - 8th. Both of these catalysts will take place duringstrong seasonal bullion buying.
Forconfirmation of a gold stock long-term bottom being in place, I am stilllooking for a weekly close above $21 on the GDX. Until we see this, along withparticipation by most of the junior resource stocks and both silver and itsminers outperforming gold in the short-term, I feel there is no need to chasegold stocks. However, beginning to accumulate your favorite juniors on weaknessis recommended.
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By David ErfleContributing tokitco.com
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