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A Grim Reaper Made Of Gold

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Published : July 09th, 2019
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Category : Today's Editorial

While some gold stocks (the South Africans in particular) continue to rally, bullion and most miners are staging a classic pullback after a major upside breakout.

This is the important monthly gold chart. The bottom line:

Breakouts are fun. Pullbacks are not!

My advice to investors: Wait for the pain. Wait for emotional pain to begin before pressing the buy button on a pullback.

I’ve highlighted key support zones on this daily gold chart, and the bottom line is this:

The current pullback could end near $1380, $1360, or it could become quite a bit deeper before finally ending in the $1330-$1250 price zone.

I don’t believe most gold investors are really prepared to handle a deeper pullback. Nervous investors should buy put options, not so much as a financial hedge but as an emotional hedge.

A financial hedge is not required at this point in the US business cycle, but any pullback can be emotionally troublesome. Investors need to do whatever it takes to handle the change in sentiment.

On this daily gold chart, note the large uptrend channel and Fibonacci retracement lines from the 2018 August low.

A “power uptrend” line has snapped and gold has only corrected down to the 76% retracement line area. A deeper correction is normal and healthy after the huge surge in the price after the monthly chart bull continuation breakout.

This is the dollar versus yen chart.

The gold and the yen are risk-off currencies. The upside breakout in the dollar against the yen doesn’t guarantee a deeper correction for gold, but it does make it very likely.

What are the fundamentals behind the gold price pullback and strength in the dollar against the yen?

I believe that both stock market and gold investors are over-estimating the Fed’s dovishness.

Most institutional money managers are predicting a series of rate cuts and more QE from the Fed, but that’s not what the Fed’s dot plot or its chairman are indicating lies ahead.

Friday’s US employment report was strong and Trump has seemingly finally realized that his tariff tax tantrums are doing nothing but harm to global stock markets.

In this situation, it’s very hard to see the Fed doing anything at the July 31 meeting other than a single quarter point “insurance” cut.

While Poland’s central bank just bought almost 100 tons of physical gold, this is likely a “one-off” purchase and India’s fresh gold import tax hike came on the same day as the strong US jobs report.

The tax hike caught bullish analysts by surprise and adds to short-term pressure on the gold price.

Investor tactics? Well, amateur investors should generally wait for a $100/ounce gold price sale before buying gold or silver. From the $1442 area highs, that would make the $1342 area a solid entry point. There’s not much else to do on the buy side until there is a $100/ounce price sale. It’s really that simple!

This is the weekly GDX chart. I called the $23-$18 price zone an important accumulation zone for investors.

Those who took my strong buy recommendation can sell a small portion of their position now, but I recommend holding at least 70% of the position for an upside journey into my first target zone of $30-$32.

I would not do any serious selling until GDX arrives in my second target zone of $38-$40. The main driver of a rally to that target zone will be a concerning rise in inflation that occurs as US corporate earnings and GDP growth continue to soften. The bottom line: Fed doesn’t need to cut nominal rates to make real rates fall in that situation. All it needs to do is…nothing! That’s because a rise in inflation with no change in nominal rates is a cut in real rates.

The bottom line: I expect an institutional money manager stampede into GDX and key individual miners will occur later this year as stagflation rises to essentially become… a Grim Reaper made of gold!

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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
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