Lagging Silver May Be Telegraphing More Gold Weakness Ahead
The U.S.Midterm Election ending without any surprises, and had stock prices soaringhigher on Wednesday, while gold was essentially unchanged. With equitiesbeing bid higher, gold is losing an important safety-related support with thereturn of “risk-on” among equity investors.
Although theexpected results saw just a 0.12% lift in gold, the GDX sold off into the closeas most traders were awaiting the FOMC meeting decision the following day.
The FederalReserve on Thursday held interest rates steady, signaling that it will stay thecourse and move rates up at a gradual pace in coming months. The centralbankers left the core of its prior, upbeat, policy statement unchanged and lookingahead, investors see a roughly 80% chance of a December quarter-point move. TheSeptember “dot plot” showed a strong majority of Fed officials forecasting thefed funds rate would be a quarter point higher by year end.
After theannouncement, the GDX was bid higher into the close and has yet to fill theupside gap created on November 1st. The global miner ETF hasremained in an uptrend since the September 11th low at $17.28,despite disappointing Q3 earnings reports from some of its largest holdingsover the past few weeks. However, gold stocks typically lead the metal and the GDX/GLDratio has begun to roll over, creating a head & shoulderstopping pattern. Moreover, the GDX has been unable to close back above its 18-weekmoving average since the first week of July, when it began to breakdown after 18 months of trading in a tight range between $21-$25.
Meanwhile, DecemberGold weakened only slightly in after-market trade yesterday, despite the U.S.dollar rising strongly and closing back above its rising 200-weekmoving average on the Cash Settle Index. A close today above 96.40 would be anew 52-week high for the world’s reserve currency. As the greenback continuesits climb higher, December Gold remains in a tight 4-week trading range between$1215 - $1240, having tested the ceiling at the $1,240 level twice this week beforefading and dropping back.
The nextpotential precious metals catalyst may be the Italianbudget crisis coming to a head next week. Eurozone finance ministershave called on Italy to revise its planned 2019 budget by November 13th, afterthe European Commission rejected the budgetary plans of Rome's populistcoalition government. The Italiangovernment insistedThursday it is sticking with its plan to rapidly increase publicspending as a dispute with the European Union over the budget intensified following thegloomy set of forecasts. The continuing crisis may bring some safe-haven bidsinto gold, along with the U.S. dollar next week.
However, themost troubling development in the precious metals complex is the persistentweakness of silver in relation to gold. The silver price typically leads goldin both directions and will need to turn around soon to assist bullion inhaving a sustainable move higher, or the complex may eventually break down withit. As the gold/silver ratio continues its climb, the hopes in gold to breakoutof its tight trading range to the upside dampens.
SIL, theGlobal Silver Miner ETF, is in danger of makinga 52-week low today, with the GDX remaining well above its recentlow. Earlier this week, one of the ETF’s largest holdings and the world’ssecond largest primary silver producer, Pan American Silver Corp. (PAAS),disappointed the market when thecompany reported a Q3 loss, along with a revenue miss. The stock isdown over 7% this week and is in danger of breaking below a 36-monthconsolidation low of US$13.50 if the silver price continues to weaken.
The bearishview has the GDX needing to hold its uptrend line from the September 11thlow at $17.28, or we could see that low tested, or possibly broken, headinginto the next FOMC meeting speech on December 19th. On the bullishside, if we get a weekly close above $1240 in December Gold, then the $1260 -$1265 region may be seen soon, along with a back-test of the $21 breakdown levelon the GDX. To invalidate the November/December bearish outlook in the miningcomplex, the GDX would have to close decisively above $21 on a weeklybasis.
Inanticipation of this possibly being a false bottom in the GDX, caution isadvised and I recommend a large cash position in your precious metal portfolio. Stopby my website at www.juniorminerjunky.com andsign up to be on the free email list. You will receive this column in yourinbox each week, along with interviews and updates on my subscription serviceavailability.
By David ErfleContributing tokitco.com
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