Metals bulls have been frustrated with repeated attempts to break out of a multi-month bull flag/falling channel. At the turn of the new year, with the presidential election all but behind the country, and with calls for more money-printing and ongoing stimulus, it seemed a given that – like the base metals and energy - gold would break out and follow the inflation narrative to higher prices. And, for three days, that is just what happened, as gold pushed from a 2020 close of $1895 to $1960 in the first three days of the new year, only to sell off hard and fall back below falling trend line support. This was gold’s second pass at $1960, which was the 6.18% Fibonacci retracement from the August high to the November low. As the saying goes, from failed moves come fast moves, and the failed move precipitated a $160 sell-off in a week and a half ($140 of which occurred in the 3 days following the peak). It was a major head fake for bulls and stopped out many traders who bought the breakout. Price also lost the 200-day moving average, which was another warning sign for bulls.
The month of November was a bit of a roller coaster for metals bulls, as price appeared to breakout, only to reverse on vaccine news and become extremely oversold by mid-December. All the more frustrating was the continued sell-off in the US dollar, which many expected to spark the next leg higher in metals prices, but new lows in the dollar coincided with multi-month bottoms in metals. Meanwhile, all attention has since returned to bitcoin, which broke out to all-time highs while metals remained in consolidation mode. So, where are we now?
In my last post, I commented on the strong breakouts in metals out of bull wedge consolidations. These breakouts were ultimately short-lived and quickly reversed on vaccine news, washing out swing longs and once again pushing price lower to another test of falling resistance. The thesis from that post remains intact – metals continue to remain in strong uptrends with price likely to push to higher highs – but in the near term price continues to digest supply and needs more time.
Gold and silver have played an important role throughout money's history. Unlike modern currencies, precious metals can't be created out of thin air and derive value from their scarcity.
Globally, how does the value of minted gold and silver coins compare to currency creation?
On the topic of future inflationary or deflationary expectations, there are strong fundamental arguments on both sides. In my simple interpretation, the deflationary camp (dollar bulls) make the case that the economy remains fractured, entire industries are being undermined by the pandemic, there is high unemployment, the personal savings rate is up, the stock market is at stretched valuations, the housing market is approaching bubble territory, and the demand for US dollars remains the prevailing undercurrent of international trade. The Fed, despite its best efforts, cannot seem to meet its inflation target. Further economic weakness or perhaps a market crash would incite a flight to liquidity, demand for dollars to meet debt obligations, and broad debt defaults, further tightening the monetary supply. A strong dollar generally weighs heavily on the price of precious metals, particularly in short-term liquidity crises, and creates the potential for a near term headwind on metals prices.
The price coiling I highlighted in gold in my last post failed to the downside, which I mentioned was a possibility. There were two key levels, the 1865-1880 band, and then 1800, which would have retested the entire move. Buyers came in strong at 1865 and price held, right at the 100 day moving average. The breakdown from the pennant has created a bull wedge, and the RSI (relative strength index) never hit oversold levels, which implies to me that bulls remain in control. Gold is not completely out of the woods – a breakout of that bull wedge would confirm that 1865 was the interim low. I am looking for confirmation above 1935 and then 1950 for next sizable move. The price action in silver and the miners confirm this thesis.
Since mid-August, sales in the physical precious metals market – red hot at the peak of the COVID outbreak – have begun to taper off slightly. This slowing of demand is directly correlated to price action. I will focus on gold specifically.
In a stark reversal from the collapse of nearly every market just six months ago, the winds of inflation have pushed the sails of those same markets back to new (or near) all-time highs. The rebound from Covid has been a V-shaped recovery, not an L-shaped, W-shaped, U-shaped, or some-other-letter shaped recovery. The move in asset prices should not be conflated with an underlying economic return to normalcy - far from it. The rebound is simply a commentary on price.
Let’s start with my favorite markets - precious metals:
The precious metals market is very clearly in a secular uptrend and prices look poised for further significant upside into the end of the year. My technical view is that in the short term prices have gotten a bit extended and that a pull back/consolidation is due (and healthy) to build the base for the next leg higher.