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A Hawkish Fed Smashed Precious Metals

 -- Published: Sunday, 18 December 2016 | Print  | Disqus 

By Thomas Furman

Oh no, not again! Oh, yes, once again precious metals along with mining shares got smashed on Wednesday. The latest attack came after the well-choreographed FOMC rate hike announcement.  For weeks the mining shares had bucked a deteriorating gold price; silver was holding up defiantly as well.  Unfortunately, the “bucking” only exasperated the divergence building between gold and mining share price.  Since miners are highly correlated and leveraged to precious metal price, divergences often correct violently with price leaping up or down.  As I wrote in a previous article (Gold Miner’s Pent-up Energy), pent-up energy was accumulating in the mining shares and it was likely not to end well and indeed, on Wednesday, that pent-up energy was released brutally to the downside. 

Upon the rate hike announcement, precious metals and mining shares alike fell hard.  To make matters worse Janet Yellen’s hawkish FED –speak following the rate hike decision embolden the short sellers and instilled fear in those holding long positions.  The level of hawkishness was a surprise as many concluded that the rate hike announcement would be soften by a dovish-speaking Janet Yellen.  The result was a massive selling panic that handed GDX and GDXJ holders a 5.5% and 6.4% loss respectively for the day.  For those holding 3X ETNs (JNUG, NUGT, etc.) the losses were amplified and they were simply decimated.  Ouch!

A Rebound is Coming:

Now for some positive news for those holding long positions or looking to enter the arena, the selling in both precious metals and mining shares is exhausting and becoming long in tooth, at least in the short term (days to weeks), as seen in the RSI and Stochastics.  Both are in their respective oversold areas.  In fact, the RSI for GDXJ daily chart hasn’t been this low since July, 2015, which bodes well for a price rebound in the near future.  Please see the chart below.

Note in the chart, Thursday’s gap-down was right into the 61.8% retracement area from the August highs.  If you’re watching for price to turn around this would be the obvious target area.  At the very least I would expect to consolidate for the next couple of trading sessions or maybe even a week or two in this area.  As far as the actual gap-down this one is fairly large (77 cents) and it warrants attention.  I’m not an advocate of gap-filing as a trading strategy but they do have a tendency to fill.

Moving away from indicators and gaps let’s take a look at what volume has to say about the latest takedown by reviewing GDXJ.  GDXJ volume was particularly elevated on Wednesday, tapering a little on Thursday, and even more on Friday.  Although still somewhat lofty on Friday it was significantly less than Wednesday’s and close to the 50-day mean.   Looking back since the peak in August, note each selloff was accompanied by initial large volume and eventually tapering to the mean with price rebounding.  Unfortunately, price is making lower highs and there is no strong evidence to support a reversal of the longer term trend…at least not yet. 

So far we have seen GDXJ’s RSI and Stochastic indicators flashing oversold and volume tapering back to its mean.   These are simple visual tools to support analysis, but viewed without considering the US dollar is foolish.  Many may argue that gold can trade with the USD…true…but more often than not there is a strong negative correlation that warrants extra attention.  For the most part gold trades up when the USD trades down. 

The most watch USD indicator is the DXY.  The DXY is a basket of currencies with the USD, Euro, and Yen making up the bulk of it constituents. From a gold analysis stand point watching the DXY is good but not the best.  The currency pairs EURUSD and the USDJPY should be examined and taken into consideration. 

Starting with the USDJPY it is easy to see it has been on a tear since early November starting before the US elections.  The pair has been on an extraordinarily parabolic move best seen on a weekly chart.  Parabolic moves most often indicate irrational exuberance (Alan Greenspan) fueled by the fear of missing out, and turbo charged by shorts covering.  In general, these moves do not end well; it’s just challenging to guess when they will actually end.  However, since Friday’s candle was an inside day, one might consider the formation as an early sign the run is tired and weakening.  Taking a look at the USDJPY RSI, note the negative price divergence (moving down as price is moving up).  The DXY has a similar pattern as well although the daily candle was not an inside day.  (For clarification the USDJPY pair is showing significant weakness in the Yen as it takes more Yens to purchase a USD.) 

The EURUSD has been weakening against the USD too but Friday’s price action supports a rebound in the days ahead.  Note the RSI is flashing positive price divergence (moving up as price is moving down).  This is bullish for the EURUSD pair, therefore bullish for precious metals and mining shares.

The Wrap:

To sum up, my current analysis suggest gold is likely to break to the upside in the days ahead venturing as far as the $1210 area but it will have to get through several price hurdles along the way.  Further, I anticipate the move up will be violent once it breaks above $1144.  The violent action will bring back some buyers looking to take advantage of the change in direction and momentum.  However, this is likely going to be a short covering rally only if significant weakness does not manifest in the USD. Short covering rallies are fickle and when the short sellers are done covering it will likely be met with intense selling, as counterintuitive as that may sound.  That action will likely take price below $1100 eventually ending up in the $980 area.  That is my target area for the gold price over the next few months not withstanding a black-swan event.


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 -- Published: Sunday, 18 December 2016 | E-Mail  | Print  | Source:

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