Despite a multi-month high in the U.S. dollar and rising Treasury yields, Gold Futures posted an all-time high at $2238 at the end of Q1. This significant event has shifted risk to the upside in the precious metals complex.
Heading into the first week of Q2, the rising USDX has clearly lost its grip on the gold market as U.S. government debt continues to spiral higher, now adding $1 trillion more every 100 days with interest payments surpassing entitlements.
Technically, the gold price and moving averages are currently in bullish sequence. We are witnessing a strong breakout following a major consolidation below key resistance at $2100 lasting 43-months, despite the stronger greenback. The price of gold has risen nearly 10% this year, while the 10-year U.S. Treasury yield has gained 10.4%.
With this critical multi-year overhead resistance now being eliminated, gold continued its relentless move higher this week after momentum hedge funds entered the gold space to actively take positions in Gold Futures for the first time since leaving in mid-2020.
On Wednesday, an overbought USDX reversed lower when reaching key resistance at 105 on dovish comments from Fed Chair Powell who stated it will be appropriate for the Fed to cut interest rates “at some point this year.”
Yet, extreme overbought gold rose to another record above $2300 despite Powell signaling that policymakers will wait for clearer signs of lower inflation before cutting interest rates.
After a technical breakout in gold was confirmed with a monthly/quarterly March close above $2100 last Thursday, this strong advance is set to continue with an initial 13-year cup & handle breakout target of $2500, and Fibonacci measurements being $2460 and $3300.
Geopolitical tensions have played a major role in accelerating the demand for gold as a safe-haven asset. As conflicts in Ukraine and Palestine continue, the potential escalation to other countries hangs over the markets like the sword of Damocles during a heated presidential election year in the U.S. Meanwhile, the four-year long wait for inevitable interest rate cuts in the U.S., EU, and UK come closer to fruition as inflation remains sticky.
With cracks beginning to appear in both the A.I. sector and bitcoin parabolas, the fundamental backdrop remains ultra-bullish for the safe-haven metal due to an ever-growing number of macro and geopolitical factors that are currently unfolding.
These include; persistent geopolitical tensions, strong central bank purchases, growing demand from China as a hedge against economic instability in the world’s second-largest economy, along with November’s high-stakes U.S presidential election.
To understand the importance of this major breakout in gold, we should let history be our guide as to what we should expect from the ancient metal of kings going forward.
During the current secular gold bull, which began at the turn of the century, this is the second time bullion has experienced an important breakout from a more than decade-long cup & handle formation.
From 1995 into 2005, the gold price produced a similar uber-bullish technical set-up, when the safe-haven metal took 9-years to form a cup below resistance at $450 per ounce. The subsequent handle took 2-years to complete. After a monthly close above the psychologically important $500 level in mid-2005, the gold price reached $1925 by September 2011.
Although the setup in gold is incredibly bullish after this recent significant breakout, the silver space only this week began to show signs of joining gold’s bullish momentum. Trader’s attention is now starting to turn to silver on rising expectations that the metal will be next to hit new record highs.
Until this week, there was stiff overhead resistance in silver at $26. Last week’s outperformance of gold stocks in relation to the cheaper precious metal into quarter-end, defying expectations amidst a backdrop of climbing Treasury yields and a resilient U.S. Dollar, was a good indication that silver would move through this strong line of resistance to begin the month of April. And indeed, it has this week.
The strong rally in silver above stiff 2-year resistance at $26 on Wednesday, means its role as an inflation hedge and safe-haven asset has returned after a 4-year hiatus despite the challenges posed by rising bond yields and a strengthening U.S. dollar.
After becoming more of an industrial metal over the past several years, silver’s safe-haven component is re-affirming its appeal amid geopolitical tensions. Last week, the Gold/Silver ratio had moved up to 90 which has been strong resistance for the past 2-years.
In the recent past, this closely followed ratio has required a trending move lower below 80 to signify silver was ready to join the gold party. The Gold/Silver ratio closed at 85 on Thursday, meaning silver still has plenty of catching up to do.
Although the gold price is just 30% from its adjusted for inflation all-time high of just over $3000, silver trading at $27 is not even close to its inflation adjusted high of nearly $150 per ounce.
Over the past 4-years, both silver and precious metals mining stocks have woefully underperformed the gold price, which has gold and silver equities presenting the best value proposition seen since January 2016.
After calling your attention in this space last month to the probability of a gold stock mean-reversion beginning to unfold, the HUI/Gold ratio has moved sharply higher since then. This closely followed index shows gold stocks quickly rising from the dead after becoming the cheapest in relation to the gold price since a major bottom at $1045 per ounce was formed 8-years ago.
Despite the gold price having more than doubled since then, by early last month gold miners had moved down to the all-time low at 0.09 reached at the depths of a major 4-year gold stock selloff into January 2016.
Fueled by the technical breakout in gold being confirmed last Thursday, the index has moved back above 0.11 this week from a significant double-bottom and is poised to continue rising. Note that when the 0.09 region was reached in early 2016, a sharp miner reversal ensued to begin the mean reversion in gold stocks which saw many juniors move up 3x-5x within 6-months.
With precious metals sector risk having shifted to the upside when the major gold breakout was confirmed last week, the fuse has been lit in a severely depressed mining space that has a lot of catching up to do after massively underperforming on average over the past decade.
Historically, cyclical miner bull up-legs after a major breakout in gold, followed by silver, have lasted up to 3-years (2001-2003, 2005-2007, 2009-20011).
Moreover, generalist investors have yet to arrive at the precious metals party en masse, evidenced by depressed metal ETF inflows and gold stock volume still near 20-year lows.
This is incredibly bullish, as it means that mainstream investors are still to come. With wildly overvalued tech stocks and bitcoin coming under pressure recently, retail investors are beginning to rotate tech stock profits into historically undervalued mining shares as the gold price is breaking out of a massive 13-year cup & handle pattern.
Once the stock market begins its inevitable correction of outsized gains, in the A.I. sector and bitcoin in particular, FOMO will eventually switch from these bubble valuation sectors into the under-owned gold stock complex.
However, the biggest leveraged opportunity in the gold complex lies in quality precious metals juniors which have been ignored by generalists since 2013. The higher-risk junior space typically underperforms the miners on the downside, then massively outperforms both the metals and its miners during major 3-year cyclical up-legs.
After both GDX and GDXJ constructed solid 15-month bases, many junior gold and silver stock trains have been leaving the station one by one over the past several weeks. With both GDX and GDXJ becoming short-term extreme overbought, many swing-trader mining speculators are in the process of rotating miner profits into beaten down quality juniors on their respective watch-lists.
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