The miners and silver are leading gold’s next move higher
Fri May 10 2024
After another volatile Fed Week, the gold price continues to consolidate recent outsized gains within a $150 range as high interest rates persist and many economists are cutting their forecasts for a rate cut in 2024 to possibly only one in Q4.
Last Friday's disappointing U.S. jobs report, showing an uptick in the unemployment rate, was followed by this Thursday’s U.S. weekly jobless claims jumping to a six-month high.
Rising unemployment may influence the Fed in future monetary policy decisions after acknowledging that they are focused on their dual mandate — full employment and inflation.
With the $2300 level being twice tested from the $2448 all-time high reached on April 12, Gold Futures moved above initial resistance at $2340 on the news.
Both the miners and silver began showing relative strength to the gold price consolidation after an uptick in the unemployment rate, coupled with negative GDP reports and inflation reported higher than expected.
Gold recently breaking out above 13-year resistance at $2100 has sniffed out the early signs of stagflation, which is low even negative growth accompanied by higher inflation and potentially rising unemployment.
Despite this evidence, we heard Federal Reserve Chairman Jerome Powell saying “I don’t see the ‘stag’ or the ‘-flation’,” during last week’s post-FOMC meeting address.
This is the very same Fed Chairman that believed inflation would be “transitory,” and that the economy would come down for a “soft landing.” Powell also believed we would enter the year and see numerous cuts due to waning inflation coming closer to the central bank’s fictional 2% target.
Following a string of U.S inflation reports during the first three months of 2024, which all came in above estimates, concerns are beginning to mount that inflation could prove more difficult to conquer than previously thought, while the U.S. economy is growing at its slowest pace in nearly two years last quarter.
Yet, higher-for-longer interest rates have not, it appears, impacted a wildly overpriced stock market. But they are impacting U.S. regional banks. Federal regulators seized Philadelphia Republic First Bancorp on April 26, a sign that the banking crisis which got underway in 2023 may not be over.
Numerous regional banks are also on watch lists. In 2023, five regional banks fell, including the second, third, and fourth largest regional banks in the U.S.
Moreover, According to S&P Global, April marked the highest number of bankruptcies in a year, with 66 filings, which is an 88% increase from January's 35 filings.
A global sovereign debt spiral has the Fed and all central banks between a rock and hard place as the financial system of borrowing endlessly with no intention of ever paying anything off is coming to a head.
The bottom line is a Sovereign debt crisis looms as interest payments will continue to quickly climb much higher unless rates fall, which is why the Fed has maintained its desire to cut interest rates in 2024 despite price inflation being nowhere near their 2% fantasy target.
Once a multi-year speculative bubble has ran its course, the Fed has a history of being reactive when it comes to interest rate policy as opposed to proactive. At a time of both historic global debt-to-GDP imbalances as higher-for-longer interest rates are threatening to spark another banking crisis, gold is anticipating the next Fed policy error.
Just as the world’s largest central bank waited far too long to raise interest rates while calling soaring inflation transitory, the Fed may also be forced to cut interest rates much sooner than they would like.
However, their ability to deal with the next financial crisis is extremely limited, which has them performing bail-ins, not bail-outs and why things appear to be deteriorating, even as the stock markets are near all-time highs and unemployment is near record lows.
Decades of interest rate suppression have resulted in debt traps in both public and private sectors, which has begun to destroy faith in fiat currencies. This now untenable sovereign debt situation has investors beginning to escape into gold, which has broken out to all-time highs in every major currency.
While bullion continues to consolidate recent gains, the increased relative strength of both silver and precious metals stocks is hinting that gold is preparing for a move to recent all-time highs.
After nearly reaching its first primary Fibonacci target at $2461 in mid-April, the next Fibonacci target in gold is at $3336 based upon the depth of the 2011 to 2015 pullback.
Meanwhile, silver is closing in on another attempt to clear stiff multi-year resistance at $30 after testing breakout support at $26 during Fed Week. Trader’s attention is now starting to turn to silver on rising expectations that the metal will be next to hit new record highs.
Presuming a breakout occurs above strong resistance at $30, the potential is there for a significant short squeeze to the next line of resistance at $34.
The silver shortage narrative is gaining attention, with demand consistently outpacing new supply. This imbalance could lead to a significant price adjustment and take silver to its all-time high near $50 sooner than most analysts expect.
With silver now bullishly leading gold, miner ETFs GDX, GDXJ, SIL and SILJ also look to close at 52-week highs later today. But over the past four years, both silver and the mining stocks have lagged the gold price, as investors continued to ignore the sector until recently.
Even though major miner ETF GDX has increased by 44% from the end of February, the overall performance is extremely weak considering the gold price has recently broken out above 13-year resistance.
While the gold price is currently 20% above its high of $1925 from Q3 2011, the GDX trades at a discount of 40% to its former all-time high in 2011 near $60.
With still plenty of catching up to do, a mean reversion in mining stocks has already begun as we are experiencing limited miner downside despite a $150 correction in the gold price.
After Q1 earnings season kicked off with strong reports from top two gold miners Newmont Corp (NEM) and Agnico Eagle Mines (AEM) at the end of April, continued strong miner earnings reports have been showing mining margins quickly accelerating much faster than inflation.
This strong Q1 earnings season has the HUI:Gold ratio moving higher off its possible double-bottom at 0.09 reached in January 2016 when gold was trading just above $1000, then recently in late February just ahead of the gold breakout above $2100.
A double-bottom in this closely watched ratio will be confirmed on a move through 0.15, which may happen soon. When the 0.09 level was reached in early 2016, a sharp reversal ensued to begin the mean reversion in gold stocks which saw many juniors move up 3x-5x within 6-months.
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, 2009-2011). 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.
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Source: https://www.kitco.com/