Gold Stocks Have Some Serious Catching Up To Do
In last week’s missive, I mentioned the probability of anear-term bounce in gold stocks, based on how over-sold the sector had becomeduring “panic week” in the global marketplace. A few hours after the articlewas posted and with the GDX down a further 3% last Friday, the last fifteenminutes of trade in the major miner ETF was bought heavily back to unchanged onthe day. The late reversal off critical support at the $21 level, coupled with hugevolume of over 100 million shares traded, is a good argument for a possiblelong-term bottom in the miners being seen.
Then on thefollowing Wednesday, the U.S. Consumer Price Index (CPI) for January wasreleased an hour before the market opened. The gold price immediately dropped$15 in minutes onthe stronger than expected consensus forecast of an increase of 0.5% inJanuary, after increasing 0.3% in December. Computer-based algorithm tradeswere set to sell gold on a higher inflation figure, based on the anticipationof another rate hike after the next Federal Reserve Open Market Committee(FOMC) meeting in March being bearish for the precious metal.
But a veryunexpected market move happened on the way to another rate-hike related beatingof the gold space. When the market translated the 0.5% rise of Januaryinflation into a year-over-year gain of 2.1% versus expectations of 1.9%, the goldshorts began to cover quickly. By the measure of the CPI, inflation is alreadyabove the Fed's 2% target, so the market began to focus on the Fed’s dot plot lagging inflation, as opposed to thebetter odds of an upcoming rate-hike in March. The gold price blew throughresistance at $1330 and ended the day reversing nearly $35 to the upside, withthe gold stocks outperforming by over 2x on nearly 90 million shares traded inthe GDX.
The strongbounce off critical support in the major miner ETF has now paused at the $23 area,which I mentioned last week as a strong resistance level before possibly headingback down for another move lower. Due to the surprisingly strong upsidereversal with large volume off the $21 level in the GDX last Friday, coupledwith the equally strong buying reaction of the CPI report, I am no longer expectinga sharp move below $21. However, this is still a possibility if we see morepanic in the global market place next week, so a bit of caution and cash isstill advised as gold stocks have been trading with the US market since thepanic move lower began last week.
Meanwhile, theU.S. dollar has continued to weaken since back-testing and reversing from the90.50 area on the Cash Settle Index at the beginning of this week. The weeklychart has formed a bearish flag and could target the 86 region if the U.S.market continues higher, while stock market volatility has also been declining.An 86 print in the greenback could easily push gold, which has now formed avery bullish cup & handle formation on theweekly chart, towardslong-term resistance at the $1375 level. As previously mentioned in thiscolumn, a monthly close above $1375 would be technical confirmation of goldbeing in a new bull market.
Anotherreason to be short-term bullish in the precious metals sector is thespeculators position in the Commitment of Traders (CoT) report for silver,which was posted last Friday. The net spec position in silver is only 30.5K contracts,or 14.9% of open interest. Since the CoT reports only contain information as ofthe previous Tuesday, these figures could be even more bullish, whenconsidering the panic into cash which ensued in all markets until the followingFriday. We will find out later this afternoon, when the latest precious metalCoT reports are released at 3:30pm EST.
Silver haspractically been given up for dead by the market recently, as the gold/silverratio is now above 80-1. The last time this ratio was at that level in January2016, gold stocks began a huge 180% move in just 6-months, while silver, alongwith silver miners, outperformed both gold miners and bullion.
The Chinesemarket is closed until February 22nd, which also happens to be OptionsExpiration in gold. Many have claimed Options Expiry day in the precious metalsto be a manipulators paradise for making sure most gold call options at keyprice points expire worthless. Watch the $1350 level closely, as there arequite a few in-the-money options at this price and traders must decide if theywant to keep their futures positions, or roll them over into the followingmonth. This will probably add to the short-term volatility in bullion next week.
If themarket continues to focus on the Fed being behind the inflation curve, asopposed to fearing future quarter-point rate hikes, then gold stocks have someserious catching up to do with the gold price. Keep a sharp eye on the $25-$26level in the GDX, as I expect a big move higher once this critical resistancelevel has finally been broken. In the meantime, a bit more patience may berequired for frustrated gold stock investors.
By David ErfleContributing tokitco.com
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