The Fed surpasses expectations for more QE to address potential liquidity issues in the repo market around year-end. This means interbank funding issues are getting worse, requiring ever more stimulus. Meanwhile, Trump announces a phase one trade deal with China “in principle”, which means nothing substantive has been agreed whatsoever. Yet, the stock market eats it up and we head to new highs. Meanwhile, the bond market takes a hit, with the 10-year yield rising back up to 1.95%.
It is no surprise that Gold, despite setting a marginal higher high yesterday, ended the day near its low.
Silver didn’t fare much better, although it did close up slightly for the day and relative to the previous close.
Miners did not escape the pain but still continue to outperform the metals. The clear standout recently has been SILJ, the junior miners ETF. It came within a whisker of its September peak at 11.57 before falling back. So while Gold and Silver continue to drift lower in their bullish flag patterns, SILJ is testing its highest level since May 2018. Unfortunately for SILJ, it also hit a negatively divergent higher high yesterday, which could signal trouble in the very short-term.
The bigger issue is that although Silver hit a positively divergent lower low this week, according to its daily RSI and both MACDs, Gold has yet to match that feat. While Silver and the miners can continue to outperform Gold, it is difficult but not impossible to see the sector move materially higher near-term without Gold establishing a clear trough. On top of that, the risk is that the rise in stocks and bond yields may have some momentum into year-end, weighing further on the metals and miners.
On the other hand, much of the good news has now been priced into stocks. The Fed has announced it will paper over any liquidity problems through year-end, and we got a trade deal in principle with China. It is not clear to me what the next catalyst will be to justify further increases in stocks and bond yields.
Simply put, we could see further downside pressure on the metals and miners in the next two to three weeks, but if and when we get that positively divergent lower low in Gold, below 1446, followed by a higher high above 1492, then we can look forward to higher highs across the sector. My preferred target for Gold on the downside has been in the low 1420s for quite some time. That represents a 50% retracement of the entire rally from 1267 to 1566. A negatively divergent peak in the 10-year yield above 1.97% wouldn’t hurt either.
December has been a very kind month to Gold in each of the past four years, but once we get that bottom in Gold, it is Silver and especially SILJ that I will be focusing on to the upside.