From a successful test down to its rising 18-week moving average near $2300 in late June, August Gold quickly regained the $2400 threshold before achieving a new all-time high at $2488 this Wednesday. But with gold becoming rapidly overbought, profit-taking this morning has driven the price quickly down to test support at $2400.
Although China’s dominance in the gold market is credited for bullion’s 2-month $450 breakout rally into April, new momentum has been building as the Federal Reserve lays the groundwork for a potential interest rate cut in September.
With many big money traders and fund managers slipping away from trading desks early for extended summer holiday vacations, Gold Futures broke through $2350 resistance during the first week of July.
The gold price made a new all-time high weekly close last Friday after the U.S. Bureau of Labor Statistics reported that its 12-month core Consumer Price Index (CPI), which strips out volatile food and energy prices, rose 3.0% in June. The report noted that this was the slowest annual increase in inflation since April 2021.
After Fed Chair Jerome Powell spent a lot of time telling Congress last week that he wants to see more evidence of cooling inflation before making a cut, this is exactly what he got. The USDX plunged below key support at 104, while yields fell across the board, after the U.S. for June revealed a substantial decline in inflation.
Lower inflation, coupled with signs of a slowing job market, has reinforced views that the disinflation trend is back on track, drawing the Fed another step closer to cutting interest rates. Heading into the Fed’s 10-day blackout period before the next FOMC meeting on July 30-31, the CME FedWatch Tool indicates a 98% probability of the central bank initiating interest rate normalization in September.
With no more Fed-speak until July 31, investors now await the July U.S. Personal Consumption Expenditures (PCE) price index report and GDP data due next week to provide crucial data for Fed officials ahead of the July 31 FOMC meeting.
The PCE report, which is the Fed’s preferred measure of inflation, is expected to show continued inflation decline. And if U.S. GDP data shows a slowdown in economic activity, gold could return to or hover around the record high it hit on Wednesday just below $2500.
Outside of dovish monetary policy, the gold price is also being supported by the chaotic U.S. presidential election. The attempted assassination of former President Trump over the weekend, combined with continued calls for President Biden to withdraw from the White House race, has brought more safe-haven buying into the gold complex.
Gold has already benefited from an increasingly volatile geopolitical backdrop over the last couple of years. With growing prospects of Trump winning the U.S. presidential election, concerns about instability in the U.S. and globally also bodes well for the gold price.
Meanwhile, gold stocks had been telegraphing an imminent move in bullion to fresh all-time highs by beginning to show relative strength to the metal during the first week of July. Both GDX and GDXJ vs gold broke out to a 14-month high before seeing some healthy overbought profit-taking heading into Q2 earnings season beginning next week.
After the market close on July 24, the largest global gold miner Newmont Gold Corp (NEM) will kick off Q2 earnings season. On April 25, lone S&P 500 gold miner Newmont rose 12.5% with strong volume to a nine-month high, after easily beating estimates for Q1 adjusted earnings and revenues.
With the gold price averaging over $250 higher in Q2 ($2334) than Q1 ($2070), gold miners are expected to report record-breaking Q2 profits beginning next week, adding fuel to an already explosive technical setup.
I expect bellwether Newmont to report another blow-out quarter next Wednesday as the gold price moved up 13%, while WTIC crude oil prices went down $16 in Q2. With 15 analysts covering NEM, the consensus EPS estimate is $0.64, and the high and low estimates are $0.86 and $0.43, respectively.
Being the largest global gold miner by producing nearly twice the amount of gold than number two miner Agnico-Eagle, NEM has been leading gold stocks in both directions since peaking near $80 in April 2022.
When the gold price failed for a third time to clear major resistance at $2100 to begin Q2 2022, NEM had lost over 60% by the time the stock bottomed at $29 in late February of this year despite the gold price having moved back up to trade near $2000.
Although margin compression had taken its toll on the entire gold mining sector, the GDX managed to be down just 35% during the same time span.
But after bottoming at its March 2020 covid spike low, and just ahead of the major gold breakout above $2100, NEM has been leading gold stocks higher. Since the low in GDX at $25.67, when NEM bottomed at $29, Newmont is up over 65% while the major gold miner ETF has risen 50%.
More importantly, back-to-back blow-out quarters from the world’s largest gold miner next week would go a long way to lure generalist funds back into the mining sector since fleeing en masse over a decade ago.
The exposure to gold, including gold and silver mining stocks, is the lowest it’s been in five years among financial advisers in the U.S. This lack of retail investment in gold stocks has delayed their expected mean reversion since the gold price broke out above 13-year major resistance at $2000 in March.
Once the cyclical bull market in gold mining stocks becomes more obvious to generalist investors, the desire to speculate in higher-risk/reward junior issues will start to ramp up.
However, the recent price action suggests that the start of this speculative ramp-up by generalists may require the gold price moving above $2500, and silver maintaining a strong $30 floor.
With the gold price attempting to break out of a 3-month consolidation, sentiment in the junior space is showing signs of turning more favorable. The financing window has also opened wider recently, as several late-stage junior gold developers have announced favorable finance packages to fully fund de-risked mining projects.
Over the past few years, the Junior Miner Junky real-money portfolio has been accumulating shares in several late-stage developers with 3x-10x upside potential from severely depressed levels. Although some of these stocks have been outperforming the sector recently, there is still plenty of upside remaining as risk is now firmly to the upside in the quality issues.
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