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Sprott Gold Bulletin

Gold Tests $1,400 Breakout

Last week was a volatile week for gold bullion which held near $1,400 per ounce. Gold was relatively steady despite the higher than expected U.S. June jobs growth reported by the U.S. Bureau of Labor Statistics on Friday. The week provided some opportunity for profit taking in the yellow metal, which has climbed approximately 19.25% since its 2018 low of $1,175 (8/16/18) and 9.11% YTD through Friday’s close. Given the Fourth of July holiday-shortened week, trading volumes were thin and volatility was likely overstated. June’s jump in job growth will not reverse our bullish outlook for gold, given that lower bond yields have been in place for several months, and the global bond market continues to price in a new easing cycle.

Indicator 7/5/19 6/28/19 Change % Chg Analysis
Gold Bullion $1,400 $1,409 $(9.74) (0.7)% Major Long-Term Breakout; Short-Term Consolidation
Gold Equities (SGDM)1 $21.67 $22.00 $(0.33) (1.5)% Head & Shoulders Breakout on Strong Buying, Short-Term Consolidation
DXY US Dollar Index2 97.25 96.13 1.12 1.2% Rallying Back to 200-Day Moving Average
U.S. Treasury 10 YR Yield 2.04% 2.01% 0.03% 1.5% Downtrend in Place, Slight Backup
German Bund 10 YR Yield (0.36)% (0.33)% (0.04)% (12.12)% Touched New Lows Last Week
CFTC Gold Non-Comm Net Position3 and ETFs (Millions of Oz) 102.1 102.1 0.06 0.1% Flat Week After Major Buying Event

To recap gold’s positive trend over the past few weeks, gold trading above the $1,370/80 per ounce level verifies a critical multi-year base breakout (see Figure 1). Gold’s rise has been impressive as multiple assets have corroborated the move, and the price action on many gold-related assets has been emphatic. The U.S. Dollar Index (DXY) broke below its 200-day moving average and bond yields declined across the board. The U.S. 10-year Treasury yield traded for several days below the important 2.04% low yield last seen in 2017. The German Bund 10-year yield continued to plunge and printed a new low of (0.36)% last week.

Figure 1. Gold Price Breaks Through Previous Resistance Levels

Figure 1

Source: Bloomberg as of July 5, 2019. Gold spot price based on GOLDS Comdty index.

Market Inflection Point?

The sheer number of chart breaking patterns across various asset classes in the past few weeks typically occurs at market inflection points. We also saw volatility spike as the SPDR® Gold Shares (GLD) put-call ratio collapsed, indicating buying panic in gold options. Net gold exposure in the futures market and inflows into gold ETFs also affirms the bullish positioning as levels were the strongest since 2016. Gold mining equities also had intense buying action, and our money flow indicator surged. Following the June 18 Federal Open Market Committee (FOMC) meeting, the global bond market is now pricing in a new easing cycle.

Gold stocks cooled this past week after surging 20% in June. Like the price of gold, the breakout for gold stocks represents a large base breakout pattern on significant volume (see Figure 2).

Figure 2. Gold Mining Equities Breakout

Figure 2

 Source: Bloomberg as of July 5, 2019. Gold stocks are measured by Sprott Gold Miners ETF (SGDM).

Given the impressive gains in gold bullion and gold stocks over the past few weeks, we would expect to see some consolidation as the market absorbs and digests this latest price action. In the weeks ahead however, we believe that the market will continue to price in lower interest rates. Equity markets are recovering to new highs despite negative news as the “Fed put” has resumed.

Market Leadership Takes on a Long Duration Theme

Leadership has taken on a long duration theme as technology, utilities, staples, real estate and gold sectors are outperforming. Commodities hover near multi-year lows as economic weakness is likely to worsen before it gets better. Meanwhile, German Bund yields are set to become more negative, and the amount of negative yielding bonds worldwide is set to surge (see Figure 3). Gold as a zero-yielding asset will look even more attractive versus an asset that is guaranteed to lose money.

Figure 3. Amount of Negative Yielding Bonds Hits New High

Fig 3

Source: Bloomberg. Data as of July 5, 2019.

1 Sprott Gold Miners Exchange Traded Fund (NYSE Arca: SGDM) seeks to deliver exposure to the Sprott Zacks Gold Miners Index (NYSE: ZAXSGDM). The Index aims to track the performance of large- to mid-capitalization gold companies whose stocks are listed on major U.S. exchanges.
2 The U.S. Dollar Index (USDX, DXY, DX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies.
3 Commodity Futures Trading Commission's (CFTC) Gold Non-Commercial Net Positions weekly report reflects the difference between the total volume of long and short gold positions existing in the market and opened by non-commercial (speculative) traders. The report only includes U.S. futures markets (Chicago and New York Exchanges). The indicator is a net volume of long gold positions in the United States.
Paul Wong
Paul Wong, CFA
Special Contributor; Paul was formerly a Senior Portfolio Manager at Sprott Asset Management and has more than 20 years of investment experience, specializing in investment analysis for natural resources investments. He is a trained geologist and CFA holder. 

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