Since late July, there has been a growing chorus of gold sector analysts calling for an imminent upside explosion in the miners based generally on the highly publicized and extreme managed money short position in gold futures. Although I happen to agree this overly large speculator short position is a time bomb which can eventually propel most everything gold related much higher once they are forced to cover, it can also continue longer than most investors believe possible.
If you are “backing up the truck” into the mining complex based solely on this thesis, then you are ignoring the very reason for this sell-off which has been tied to the U.S. dollar becoming the safe haven of choice during the ongoing emerging market currency crisis and global trade war disputes. Until these threatening factors begin to ease, or are addressed by the Fed with a halt to its monetary policy tightening, there may not be a catalyst for the record managed money short position to unwind in the near-term.
Earlier this week, gold back-tested the $1220 region on the back of Fed chair Jerome Powell’s slightly dovish opening Jackson Hole conference speech, which was given last Friday morning. Since this test, bullion has retreated back down towards critical monthly support at $1200, so I feel we will not see a short cover rally of substance until gold can close above $1220.
However, if the U.S. dollar closes decisively below 95 on the Cash Settle Index on a monthly basis today, the large spec short position may begin to see some nervous short covering into the holiday weekend. Gold has been trading inversely to the U.S. dollar since the decline began in mid-April and the sell-off began to pick up steam once the world’s reserve currency broke strong resistance at the 95 level during the second week of this month.
President Donald Trump has several times in recent weeks criticized the Fed for raising interest rates, most recently saying in an interview with Bloomberg News on Thursday that “We are not being accommodated” by the Fed when it comes to trade disputes, then added “That being said … I’m not sure the currency should be controlled by a politician.”
Nevertheless, the big question on miner investors minds remains, is this a “dead cat bounce”, or did we strike a major low in the GDX on August 15th? The bearish case see’s the GDX and silver continuing to lead gold lower after this relief bounce ran out of steam earlier this week. However, the volume has been declining after the bounce was halted at the August 15th gap in the major miner ETF and the sector remains extremely over-sold on a weekly basis, which is a strong argument for the mid-August exhaustion low being a bottom. Either way, the monthly close today in both December gold and the GDX will provide us with another important clue for the answer to this all-important question.
The numbers to watch on a monthly closing basis are the $1200 level in December gold and the $18.50 level on the GDX. A close below these critical points today may usher in the continuation of the waterfall decline in the major miner ETF next week, when most professional traders and fund managers will be back at their desks after the Labor Day Weekend and a summertime of family vacations. This holiday is notorious for producing major high’s in U.S. equities, and/or accelerating strong moves lower in the precious metals complex. In relation to U.S. equities, it did so in 1929 and countless other times on a seasonal basis. Since gold stocks are equities, they are not immune to selling off with the U.S. stock market.
Caution is still advised and a large cash position is recommended to take advantage of some very good entry points, which are beginning to appear in quality juniors with proven management teams. If you need assistance in choosing the best precious metal juniors to invest during this capitulation sell-off in the complex, stop by my website at www.juniorminerjunky.com and check out the subscription service.
By David Erfle
Contributing to kitco.com