2. Points To Be Covered Today:
• Gold Increased In Response
• Powell Downplayed The Danger Of Rising Prices
• High Inflation Readings
• Implications For Gold
• GDX, GDXJ: A Fall Before The Carnage
• USDX
3. Gold Increased In Response
• Powell admits that inflation is well above the Fed’s target, but he still
considers it transitory. Gold increased in response – only to fall again.
• Last week, Powell testified before Congress. On the one hand, Powell
admitted in a way that inflation had reached a level higher than expected
and is above the level accepted by the Fed in the longer run:
• Inflation has increased notably and will likely remain elevated in coming
months before moderating.
• It means that the Fed was surprised by high inflation, but it doesn’t want to
admit it explicitly. Instead, Powell admitted that inflation would likely
stay at a high level for some time. The obvious question here is: why
should we believe the Fed that inflation will really moderate later this year,
given that the US central bank failed in forecasting inflation in the first half
of 2021?
4. Powell Downplayed The Danger Of Rising Prices
• What’s more, Powell acknowledged that he hasn’t felt comfortable with the
current level of inflation:
• Right now, inflation is not moderately above 2%; it is well above 2%. The
question is, where does it leave us six months from now? It depends on
the path of the economy.
• It means that, at some point in the future, if high inflation turns out to be
more persistent than expected, the Fed will act to bring inflation back to
lower levels.
• However, nobody knows when exactly it could happen – and I bet that, for
political reasons, it would happen rather later than sooner.
• Indeed, even though inflation turned out to be higher than previously
thought, Powell downplayed the danger of rising prices, reiterating the
view that inflation is transitory. In particular, Powell maintained that recent
price hikes were closely related to the post-pandemic recovery and would
fade after some time.
5. High Inflation Readings
• The high inflation readings are for a small group of goods and services
directly tied to reopening.
• I dare to disagree. It’s true that the hike in the index for used cars
accounted for one-third of the June CPI jump.
• But two-thirds of 5.4% is 3.6%, still much above the Fed’s target! Anyway,
in line with its narrative, the Fed doesn’t see a need to rush with
its tightening cycle.
• After all, the US labor market is – according to Powell and his colleagues
from the FOMC – still far from achieving “substantial further progress”, with
7.5 million jobs missing from the level seen before the start of
the pandemic.
• So, the tapering of quantitative easing is – as Powell noted – “still a ways
off”. So, overall, Powell’s remarks were dovish and positive for the
yellow metal.
6. Implications For Gold
• What does Powell’s recent testimony imply for the gold market?
Well, the yellow metal initially rose after his appearance in Congress.
• This is probably because investors bought the narrative about
transitory inflation and decided that monetary taps would stay
open for a long time and tapering would start later than
investors expected in the aftermath of the recent dot-plot.
• The rising cases of the Delta variant of the coronavirus is another
reason why investors could bet that the Fed would maintain its
accommodative monetary policy.
• So, the bond yields declined, while the price of gold increased as the
chart below shows.
7. Gold Prices & 10-Year Inflation-Indexed Treasuries in 2021
8. Gold’s Reaction Was Disappointingly Soft
• However, gold’s reaction was disappointingly soft given the dovishness of
Powell’s remarks, and the yellow metal declined again later last week amid
some better-than-expected economic data.
• It seems that there is hesitancy among precious metals investors about
whether or not to take a more decisive step with purchases of gold.
• The reason is probably that, sooner or later, the interest rates will have
to rise in response to inflation. It means that the opportunity costs of
holding gold will increase, exerting some downward pressure on gold.
• Nevertheless, the real interest rates should remain low, so gold prices
shouldn’t drop like a stone.
• Actually, in the longer run, when inflation creates some economic problems
while the economic growth slows down, the yellow metal could finally
benefit from the stagflationary conditions.
9. GDX, GDXJ: A Fall Before The Carnage
• Gold holds tight, but this is rather an anomaly – after a fall, the
mining stocks will be sent to slaughter. They are even declining
on their own now.
• Finally, after a few weeks of relatively small changes and telling
you that whatever minor happened (or what didn’t happen) was
a confirmation of the previous forecast, now I can report to you
multiple interesting developments.
• And yes, they also confirm the previous forecast, and you
already saw the results, as your trading account got bigger once
again; but this time, the clues are even more decisive and more
varied.
11. Stock-Based RSI Moved Below
• That was the third time when the stock-based RSI moved below the
70 level, which – based on the similarity to early 2020 – might be
signaling that the top for this rally in stocks is already in.
• If it is indeed in, then the really bad times for the mining stocks and
silver have just begun. Their yesterday’s performance seems to
confirm that.
• If it was not the final top for the stock market, then… The precious
metals sector is likely to slide anyway because of what’s going on in
the USD Index, and because the mining stocks’ underperformance
provided us with not one, but multiple screaming sell signals in the
previous weeks
13. Inverse Head-and-shoulders Pattern
• During yesterday’s session, the USD Index moved above the neck level of the
broad (~yearly) inverse head-and-shoulders pattern and then it corrected
somewhat while still closing the day above the neckline. And it’s been moving
slightly higher in today’s session, at least so far.
• This is a very bullish price action – the USDX’s breakout was not accidental, nor
was it based on geopolitical news (the latter tends to trigger temporary moves
that are then reversed).
• Additionally, it was preceded by a consolidation. Consequently, it seems that this
breakout has a huge chance of being confirmed and followed by another sharp
rally. The previous highs at about 94.5 are the initial upside target, but based on
the inverse H&S pattern, the USDX is likely to rally to about 98.
• Consequently, what just happened (the breakout above the formation’s neckline)
has really bullish implications for the U.S. currency.
• And since the latter tends to move in the opposite direction to gold, silver, and
mining stocks, it’s also very bearish for them.
15. Mining Stocks
• Interestingly, so far, gold didn’t do much. It declined visibly
yesterday, but it then came back up before the end of the
session. At the moment of writing these words, gold futures are
trading just $1.50 below Friday’s (July 16) close.
• No wonder – even though the USD Index is completing its
major, inverse H&S formation, it didn’t move significantly in
nominal terms.
• This is incredibly exciting for those who hold short positions in
the mining stocks because this means that the huge impact
falling gold will likely have on the miners is still ahead. And
miners declined significantly anyway!
16. Mining Stocks - I
• Before moving to the mining stocks, please note that the
back-and-forth trading right after the first move lower is
normal for gold. I marked those cases with ellipses.
• Consequently, the fact that gold moved back-and-forth
now doesn’t make the forecast for gold bullish.
Conversely, it’s a normal course of action right before a
powerful slide.
• And speaking of powerful slides, gold stocks could no
longer wait and they declined before gold did.
18. GDX ETF (Senior Gold Miners)
• The GDX ETF (senior gold miners) moved below the recent
lows, and it closed the day below the neck level of a head-and-
shoulders pattern in terms of the closing prices.
• The stochastic indicator flashed a fresh sell signal as well.
• While gold is far from its late-April lows, the GDX just closed
the day below them.
• And if you think this kind of relative weakness is bearish, just
wait until you see what the junior mining stocks did.
