The news headlines this week, along with the rising gold price, is implying investors across the globe have finally accepted that inflation will continue to run hot. Despite the best efforts by central banks to convince them that surging prices of most everything is transitory, December Gold futures are headed for their biggest weekly gain in six months. The gold price has also moved sharply above both its 50-day and 200-day moving averages.
Inflation fears are returning to the fore, with China’s higher-than-expected consumer and producer prices being the latest in a series of red flags about risks to the world economic outlook. China’s October Consumer Price Index (CPI) climbed 1.5% compared to a year ago, exceeding market forecasts of 1.3%. Factory gate inflation climbed 13.5%, which was its highest print in 26 years.
In the U.S., Producer Pricing Index (PPI) showed an increase of 8.6% YoY on Tuesday, as the energy percentage changed by 30% over a 12-month period. And although the Consumer Price Index (CPI) released the following day was predicted to rise 0.6% from September and to 5.9% year-over-year, the numbers for October in the world’s largest economy came in at 0.9% and a whopping 6.2% increase year on year.
Amid the reaction to the U.S. CPI data this week being the highest in over three decades, the gold price managed a headline grabbing technical breakout above key resistance at $1835 as real yields tumbled to fresh record lows.
After last month’s inflation data exceeded expectations, gold was pressured by investors fearing the Fed raising interest rates sooner than previously anticipated to tame inflation. Higher interest rates tend to dampen demand for gold, which is a zero-yielding asset.
However, since the Fed continued its “inflation is transitory” mantra during the FOMC meeting last week, markets are finally beginning to realize the world’s largest central bank is between a rock and a hard place regarding monetary policy. The Fed “using its tools” has been unable to bring inflation down without reaching maximum employment, and the economy is unable to reach maximum employment under President Biden’s authoritarian mandates.
Not only have investors begun to lose faith in the Fed’s monetary policy, several Federal Reserve members are fleeing the central bank. Two Fed presidents resigned in September amid ethical controversy, and Randal Quarles announced this week that he also plans to resign from the Federal Reserve’s Board of Governors when his four-year term expires at the end of the year. Another position remains vacant as well, with a third position for the central bank opening up in January when Vice Chair Richard Clarida’s term expires.
Moreover, an investigation into potential insider trading among Fed members may be enough to bring an end to Jerome Powell’s tenure as Chairman when his term ends in February of 2022. Rumors are swirling that President Biden may appoint Lael Brainard, as she is the only Democrat on the seven-member board.
Therefore, there is the potential for three to four Board of Governor slots becoming available in the near future. Democrat candidate favored changes would give the Biden Administration the ability to tip the scales in their favor, despite the Fed claiming to be independent from the government.
Meanwhile, from a technical perspective, things are lining up well for buyers to potentially take December Gold futures towards the $1,900 level next and retest the June high at $1,920 in the near-term. There are two encouraging signs this latest breakout will not be a “fake out” like multiple moves previously during a 15-month gold price consolidation process.
One is that price is breaking higher out of a bullish technical pattern, combined with the convergence of ongoing bullish macro fundamentals. After being coiled up in a narrow $100 range for several months now, the sharp move above key resistance at $1835 has caught the attention of momentum traders betting on the technical break moving higher. The other is that gold continued its bullish momentum and rose for the sixth consecutive session on Thursday, despite the renewed strength in the U.S. dollar breaking out to a 16-month high.
Since the last trading session of Q3, I have been documenting strong hints in this weekly column that a significant bottom has been in the process of being formed in the gold stock complex.
During the last week of September, global miners Agnico Eagle Mines Ltd (AEM) and Kirkland Lake Gold (KL) announced that they have agreed on a merger of equals, with the combined company to continue under the former’s name. In my October 1st column, I stated that this high-profile deal announcement could trigger more M&A activity, along with being instrumental in creating another significant bottom in the mining space.
Once the merger was announced, a handful of deals have followed in the mining complex over the past several weeks, with single-asset producers being the focus of recent acquisitions. The most significant being this Monday’s announcement of Australia’s Newcrest Mining (NCM.TO) entering into an agreement to acquire all outstanding common shares of Pretium Resources (PVG.TO) it does not already own in a deal that values the Canadian miner at $2.8 billion.
Both the GDX & GDXJ, along with the silver price, are beginning to breakout of their respective 4-month inverted head & shoulder bottom formations this week. Additionally, junior precious metal miners have been outperforming the seniors, reflected by the GDXJ/GDX ratio moving higher since Q4 began. Once we see a weekly close above $47 in GDXJ, I expect the higher-risk developer/exploration juniors to begin out-performing the mining sector.
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