The precious metals sector of the market continues to oscillate widely; rallies start with an abundance of energy creating much excitement only to fall back and test various support levels. This year alone gold has rallied three times only to fall back and test support at the $1200.00/oz level, but remains above the price level at the start of the year. Silver, however, has not managed to hold its ground and is now trading just below those price levels. What does this mean for the producers, well they too have had a torrid time having rallied three times and also fallen back to where they were at the beginning of 2017.
In my humble opinion the most important single factor affecting the precious metals sector is monetary policy. In Europe last week the Bank of France Governor, Villeroy de Galhau, who is also on the ECB’s monetary policy-making panel, suggested the bank would not necessarily shift out of the current easy-money policies just yet. At the same time Peter Praet, the chief economist for the ECB said “we still need a long period of accommodative policy before we are ready.” So the Europeans may have the desire to follow the Federal Reserve and normalize rates but they are not all in agreement regarding the way forward, which leads to confusion and gives the financial markets the jitters.
A similar situation exists in the US where Janet Yellen has stated that the Federal Reserve would like to normalize interest rates providing that their two objectives are met. These are job creation and inflation. Job creation would appear to be there as the official figures show the US as having almost full employment so there isn’t a lot more to be gained in this area. However, inflation had shown signs of life but of late the annual price increases fell to 1.9% in May from 2.4% in March. This unexpected fall will give the Feds food for thought regarding further rate hikes and the frequency at which they are applied. September and December are the favored months as they are accompanied by a press conference with Janet Yellen.
The implementation of these policies, real or perceived, suggests to the market that the US Dollar and the Euro will strengthen and as gold has an inverse relationship to the dollar it will fall in dollar terms. To some extent the talk of more rate hikes as already taken its toll on the precious metals market causing sentiment to fall and investors to flee.
The euro has gained almost 10% this year, despite Brexit; however, the US dollar has lost almost 7% so the specter of more rate hikes hasn’t boosted the dollar’s value at all. Maybe the dollar doesn’t believe there will be another hike this year and what we have had so far is too small to be of any significance, hence its lackluster performance. However, this does not explain why gold is not rallying against the dollar. Markets do get out of kilter from time to time and this could be the case with gold. If the prospect of rate hikes starts to decline and this is an aberration in the price of gold, we could see a dramatic second half rebound. After all the Fed is not known for ‘cavalier’ style moves, so I expect their conservativism to remain data driven and the data doesn’t support more rate hikes.
The Chart of the Gold Bulls Index; HUI
Taking a quick look at the chart of the HUI we can see that it has rallied three times in line with gold prices, alas the rallies didn’t have the legs to make a serious attempt of challenging old all-time highs. Despite a good start to the year the miners have not made any progress this year as the chart clearly shows. There are three technical indicators shown on this chart; the RSI and the MACD which suggest a slightly oversold position and the STO is on the floor suggesting a near term rebound.
Also of note is that the 50dma is just below the 200dma, so if gold could move higher, the 50dma could swing in an upwards motion through the 200dma forming a golden crossover, which is usually bullish for gold.
However, none of the indicators are 100% accurate and stocks can stay oversold or overbought for some time which negates their importance as indicators.
At the moment the HUI remains some 71.74% off its high (630-178) made in 2011.
The summer season usually sees gold in the doldrums and this summer is no exception. The precious metals sector could languish in this state for another month or so before the fall arrives and the metals shine again.
As investors we are faced with a dilemma; are the mining stocks finished as the surrounding gloom suggests or is this a wonderful buying opportunity for a down trodden sector of the market?
It is your hard earned cash that is on the line so you have to do the work and make that final decision. Our humble opinion for what it is worth is that this a good time to acquire more of the good quality precious metals mining stocks.
Finally, don’t go mad on one particular stock, that’s an ‘all your eggs in one basket’ approach, try to find at least half a dozen stocks that you can analyze, understand and comfortably track on a regular basis.
Got a comment, then please fire it in whether you agree with us or not, as the more diverse comments we get the more balance we will have in this debate and hopefully our trading decisions will be better informed and generate better results.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.