At present, gold is caught in a medium-term corrective cycle, while long-term price charts and macro fundamentals still firmly favor the safe-haven metal going higher once a now 6-week correction has run its course.
As mentioned in this column heading into the U.S. presidential election, gold had been long overdue for a 5-10% correction. The 54% 12-month surge in bullion into the end of October had yet to experience as much as a 5% correction heading into a chaotic U.S. election, with the overwhelming result having led to some healthy profit taking from an extreme overbought situation.
After a year-long $978 move higher peaked at $2802 on October 30, Gold Futures fell by nearly 10% in just 13 trading sessions to a November 14 low at $2541.
Bullion has been consolidating this sharp move lower within a symmetrical triangle above support on its rising 18-week moving average, now at $2640. There is downtrend resistance at $2700, with gold’s 18-week moving average having been strong support since bottoming at $1825 in late October, 2023.
A breakout above $2750 would signal a move to $3000, which is the initial target of 13-year cup & handle March breakout. A breakdown below $2600 would signal a test of gold’s 200-day moving average, now at $2450 and set to hit $2500 before year-end, and a technically reasonable correction in any bull market.
Heading into year-end, the gold complex has been grappling with uncertainty over geopolitics, global trade, and economic growth, particularly in Europe, where the French government collapsed this week. There are two major powers in Europe - France and Germany, both of which are now dealing with an emasculated government.
Adding to gold's geopolitical component, even after Israel agreed to a ceasefire under pressure from the U.S. and the international community, it is too early to talk about peace in the Middle East as the temporary truce has already been violated by both sides.
There are still many risks in the region as well, including Iran, which has promised to attack Israel again, who in turn will have a response. Not to mention a civil war in Syria.
There have also been rumors that the U.S. could supply nuclear weapons to Ukraine after Russian President Vladimir Putin authorized the firing of a new intermediate-range ballistic missile and warned it can reach many U.S. missile bases.
Putin said in a televised address last week that U.S. air defense systems would be powerless to stop the new missile, which flies at 10x the speed of sound and capable of delivering a nuclear warhead.
Central banks around the world are stocking their gold arsenals as a shield against external shocks, such as prospective trade wars brought on by Donald Trump’s coming second presidency and geopolitical tensions in Ukraine and the Middle East.
On Wednesday, the World Gold Council (WGC) reported 60 tons of net gold purchases by central banks in October, the highest amount recorded in 2024. Eastern European central banks have made a particular show of topping up their gold reserves.
While the focus for much of the year was on China’s massive central bank gold purchases – and then on their move to the sidelines as prices hit record highs – the nations of Eastern Europe have quietly emerged as the largest buyers of the precious metal, and the biggest back stoppers of the gold rally.
Several global central banks have been increasing gold reserves while lowering their dollar holdings since Russian banks were removed from SWIFT, effectively denying them access to international markets in March 2022.
The world economy and peace survive on free trade. The sanctions against Russia blackballing it from the SWIFT system has led to BRICS stepping up bullion buying as other nations have also rejected U.S. authoritarian policies.
Meanwhile, gold volatility has increased as markets prepare for President-elect Donald Trump's unpredictable administration. Trump's pledge to impose steep tariffs on Canada, Mexico and China last week jolted markets and upended interest rate and inflation forecasts.
Over the weekend, Trump then threatened BRICS nations with 100% tariffs if the trading bloc developed its own settlement currency to avoid the U.S. dollar. Economists have noted that potential trade wars as a result could push the global economy into a recession.
Officials from Mexico, Canada, and China have warned U.S. President-elect Donald Trump's threat of imposing hefty tariffs on goods from the three largest U.S. trading partners would harm the economies of all involved and would risk aggravating inflation and damaging job markets.
Supply disruptions could result as well, considering proposed mass layoffs, firings, and the deportation of immigrants, many of whom are employed, especially in construction and agriculture. Deportations and firings could also create labor shortages, driving up wages.
Import tariffs during President-elect Donald Trump's first term broadly lowered stock values on the day they were unveiled, and were associated with lower future profits, new analysis by Federal Reserve Bank of New York staff concluded this week.
After the world's reserve currency rose for 8 consecutive weeks above stiff overhead resistance at 107, the USDX moved back down below this key level last week. The U.S. dollar index closed November with a nasty reversal candle and is now threatening to close below key support at 106 on a weekly basis later today.
It is hard to believe that the U.S. dollar's strengthening can continue much longer as it will negatively impact U.S. exports and hurt countries with dollar-denominated debt. Trump has also repeatedly advocated for a weaker dollar, further compounding this bearish USD view.
With core PCE inflation now at 2.8% and rising, last week's data reaffirms that consumer prices are likely bottoming above the Fed's 2% target.
Yet, despite the stubborn inflation data, unemployment rising to 4.2% this morning has the CME FedWatch Tool showing a 90% chance of a 25-basis-point rate cut during the final FOMC meeting of 2024 on December 18, followed by at least 3 more cuts in 2025.
The latest reading of the Federal Reserve's preferred inflation gauge showed that while prices saw a marginal increase in October compared to the previous month, inflation remains well above the central bank’s fantasy 2% target, proving the Fed has caved on inflation as they continue to lower interest rates.
The untenable sovereign debt crisis, increased tariffs, supply disruptions, and war are all inflationary. When the Federal Reserve, fearing recession, cut its federal funds target rate by half a percentage point in September, the goal was to make it cheaper to borrow money across the economy and thereby stimulate growth.
Yet, the yield on 10-year Treasuries unexpectedly went up after the Fed announced its cut as the central bank can only control short-term rates. This unexpected movement in bonds is significant as the yield on the 10-year is not just the interest rate the government pays on its exponentially rising debt, it is also the benchmark for many other interest rates. Including mortgages, auto loans, and corporate borrowing.
The specter of new trade tariffs and more aggressive protectionism by the major industrialized nations, led by the U.S., only adds to worries about inflation being reignited to drive up bond yields even farther.
When the 10-year rate increases, it is not cheaper to borrow money across the economy and thereby stimulate growth, while foreigners (i.e. central banks, pension funds) are now balking at adding new U.S. debt securities as well.
China, formally the largest buyer of U.S. debt, and Japan are ditching U.S. Treasuries like never before. In the third quarter of 2024, Japan sold a staggering $61.9 billion of U.S. government debt - the biggest quarterly sale on record. This came right after they offloaded $40.5 billion in the second quarter.
China, now the largest seller of U.S. Treasuries since the U.S. took Russia off SWIFT, dumped $51.3 billion in the same period. This was China’s second-largest reduction in history and the continuation of a trend.
The central bank of the world's second largest economy has reduced its Treasury holdings in six out of the last seven quarters. As U.S.-China relations soured, total holdings have now dropped below $800 billion, a level not seen in 16 years.
With the bond market being double the size of the stock market, it is far more important but few pay enough attention to it. There is a saying in the financial marketplace that bond traders are the smartest people in the room.
The recent rise in U.S. Treasury yields has been due in part to heightened worries from savvy bond traders about unsustainable rising government debt levels, not only in the U.S. but in the European Union as well.
The U.S. government’s debt load is now seen as the biggest risk to financial stability, outweighing persistent inflation in a Federal Reserve survey. “Concerns surrounding U.S. fiscal debt sustainability were atop the list this survey, followed by escalating tensions in the Middle East and policy uncertainty,” the Fed said in its semi-annual financial stability report.
High debt burdens among countries are manageable…until they are not. With the U.S. National Debt at over $36 trillion and currently increasing at $2.5 to $3 trillion per year, the world's largest economy is on the verge of another economic crisis - far greater than the GFC in 2008.
This coming crisis could destroy the U.S. Dollar in its current fiat/unbacked form, which has been in place since 1971, while the gold price has risen 78x since Nixon closed the gold window.
When enough large buyers of U.S. debt decide to stop purchasing new debt to pay for the old debt, the world's reserve currency Ponzi Scheme ends.
Rising bond yields are usually bearish for the safe-haven gold and silver markets, as both precious metals offer no dividend and higher bond yields produce better returns for investors.
However, after the self-proclaimed "King of Debt" takes control of the world's largest economy on January 20, keener marketplace focus on exponentially rising and untenable sovereign debt loads amid rising protectionism would be bullish for the safe-haven metals.
Trump’s radical plans on tariffs, tax cuts, and deportation highlight the risk that inflation and debt may both surprise to the upside - two factors gold investors seek protection from.
Meanwhile, both silver and the mining sector have begun to show relative strength to gold this week, hinting the symmetrical triangle consolidation may soon result in a breakout to the upside.
With major miner silver ETF (SIL) showing relative strength to both gold and its miners by trading at a 52-week high, higher-risk junior miner gold ETF (GDXJ) has been outperforming major gold miner ETF (GDX) as well.
Moreover, silver has formed a weekly rounded bottom above key support at $30, with the gold/silver (GSR) ratio bullishly trending lower since peaking at 90 last week.
Initially, a break under 80 would be a positive development, while a sustained move below 75 in the GSR is required for the next sustainable breakout in gold and the miners.
Both GDX and GDXJ corrected 20% in 4-weeks after a 70% move higher in 10-months from February lows. We need to see both silver moving back above $32.50 and the miners showing consistent relative strength to gold for more confidence of a sustainable bottom being in place.
A monthly/yearly close above key multi-year resistance at $40 in GDX would signal the next up-leg towards the 2011 all-time high at $60, when the gold price peaked at $1925.
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