Gold enthusiasts have waited YEARS for their day to come. But it never does. For the last 5 years, Gold has traded in a fairly narrow range with the high being about $1370 and a low of, a bit above $1000. Will this run up be different?
We have been prematurely BULLISH on Gold for at least a year. And wrong. The case for Gold, however has become much stronger.
From a supply standpoint, the amount of Gold mined has been dropping substantially. In addition, the remaining producing mines yield an average of 1.4 ounces per ton of ore. This is about 15% of the level experienced in the 1970’s. Bottom line is that the cost to produce an ounce is quite possibly LESS than than the price of Gold. (https://www.zerohedge.com/news/2019-03-25/are-we-running-out-gold).
Another plus is that Gold has risen DESPITE the headwind of a generally rising Dollar.
It is still unclear as to why GOLD has rallied over the last two quarters. A viable explanation is that it is foreseeing a financial crisis and the resultant QE. The Fed MUST eventually resort to buying Treasury Debt, simply to fund the HUGE Budget deficits that are on the horizon. “The Unstoppable Parabolic Increase in Debt”. (https://markonomics101.com/2019/03/24/the-unstoppable-parabolic-increase-in-debt/).
Gold may be rallying in anticipation of a jump in inflation down the road. As of yet, there are very few signs pointing in that direction.
Gold Miners Are Strong
After a very severe decline, Gold Mining stocks are showing some real strength. Two of the largest miners Newmont and Barrick, have both acquired significant competitors and reduced their average cost of production. “Gold Approaches Major Buy Zone” (https://markonomics101.com/2019/01/26/gold-approaches-major-buy-zone-chart-of-the-day-12/).
Some key charts are below in a slide show. The takeaways are the following:
- GLD, the Gold ETF has formed a MASSIVE 5 year ROUNDED BOTTOM. This move up does not become real until GLD breaks $130. Once that happens, a substantial rally becomes highly likely.
- The Gold Bugs Index of miners (HUI) may be forming a parabolic Uptrend. However, unless GLD itself confirms the move, any conclusion is premature. Nonetheless, it appear far more likely that HUI and GLD will finally push through resistance than not.
- Miners Goldcorp and Yamana are poised to turn their patterns BULLISH. Barrick, which acquired South African miner Rand Gold, appears to be breaking out. If the other two miners follow suit, the prospect of a substantial rally will be at hand.
Is Gold Sniffing Out Inflation?
The collapse in oil prices in the 4th Quarter from $75 to $40 pretty much ensured that reported inflation would remain low as it worked its way through the system. Commodity indexes are dominated by energy prices, including Gasoline, Natural Gas, and Crude Oil. Energy is a major component of the cost of producing just about anything, including energy itself.
Since the beginning of 2019, oil has sharply rebounded and has moved up to $60. Were it to continue to climb higher, the effects would impact the costs of just about everything as it disseminated through the system. It would very likely create a huge problem for the Federal Reserve who we think will CUT rates sooner rather than later. Oil is not very likely to continue MUCH higher from here because of the increased production of Shale Oil, which becomes quite profitable at about $60.
What Do The Charts Say?
We present our second slide show of the day which reveals how other factors may come into play for Gold. The key takeaways are the following:
- Energy prices, led by Unleaded Gasoline and Crude Oil (WTIC), have rallied substantially, but are probably capped by Shale Oil from rising much further.
- The Dollar Index is still in an uptrend within a BEARISH ASCENDING WEDGE. The US Dollar is probably strong because of the large interest differential between U.S. Treasury Debt and alternatives. It is believed that $10 Trillion in Bonds around the world have NEGATIVE rates. In order for foreign investors to earn the extra yield available in the United States, they must use Dollars to buy the Bonds.
- Commodity Prices, as measured by the CRB Index, continue to trade in a fairly narrow Trend Channel. In order for inflation to take root, this index needs to break ABOVE resistance. It still has a long way to go.
- Copper (COPX) appears ready to move higher. Copper prices are HIGHLY correlated with economic strength. This is one sign that economic weakness may turn to strength in the not-too-distant future.
The various ways to play Precious Metals are not fully baked, but they are getting close. It still makes sense to see if Gold can break 5 year resistance. The ROUNDED BOTTOM pattern is very well developed and a breakout would likely be met by Gold fever.
Even if Gold fails to break out in the near term, the diminishing supply is very likely to push it higher EVENTUALLY. Gold is great insurance against a financial calamity so holding some is almost NEVER a bad idea.
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