Monday, November 11, 2019

Sprott Report: The Sweet Spot for Gold Equities

October was another consolidation month for gold bullion. Gold traded in a narrow $33/oz range dictated mainly by the action of global bond yields. Gold held above our support level of $1,450 and consolidated within a bullish wedge pattern. From a positioning view, Commodity Futures Trading Commission (CFTC) longs had a minor pullback. CFTC shorts remained unchanged while ETF holdings continued their gradual accumulation. 

Since the gold price peak in early September, there has been an uneven nascent risk-on short-term basing action in some parts of the capital markets. The October 30 Federal Open Market Committee (FOMC) meeting resulted in the expected 25 basis point cut in interest rates and a signal from the Fed that future rate cuts may be on hold, representing more of a “pause-lite” rather than an “absolute pause.” With the “Fed put” reaffirmed, the U.S. stock market rallied to new all-time highs, yields declined, the U.S. dollar fell and gold closed higher on the day.

Month of October 2019

  • Indicator 10/31/19 9/30/19 Change % Chg AnalysisGold Bullion $1,513 $1,472 $40.56 2.75% Consolidating in short-term range, before rise 
  • Silver Bullion $18.11 $17.00 $1.11 6.55% $17 base held, carving out base
  • Gold Equities (SGDM)1 $24.13 $22.90 $1.23 5.25% Breaking out from a consolidation flag
  • DXY US Dollar Index2 97.32 99.38 (2.06) (2.1)% Testing bottom of rising trend
  • U.S. Treasury 10 YR Yield 1.69% 1.66% 0.03% 1.6% Consolidating in short-term range
  • German Bund 10 YR Yield (0.41)% (0.57)% 0.1% 28.07% Consolidating, major downtrend in place
  • U.S. 10 YR Real Yield 0.14% 0.14% (0.00)% (0.00)% Consolidating in short-term range
  • 0 $14.76 ($1.93) (13.1)% Pullback inline with yields
  • CFTC Gold Non-Comm Net Position3 and ETFs (Millions of Oz) 111.20 116.90 (5.67) (4.9)% Pullback in CFTC longs only
We believe that the recent injection of liquidity has continued to inflate asset prices. The S&P 500 Index has made new highs despite weakening global growth, an earnings slowdown and funding stress. By contrast, global bonds continued to trade near highs as signs of economic weakness abound.

The 5Y/5Y inflation swaps for both the U.S. and EU remain subdued with a long-term downtrend solidly in place. The EU 5Y/5Y touched all-time lows in October despite the launch of quantitative easing (QE) by the European Central Bank (ECB).

Credit stress remains subdued, likely due to the massive liquidity injections in the repo market, although LIBOR-OIS (London interbank offered rate-overnight indexed swaps) spreads remain elevated in line with the condition of the repo market. Commodities continued to struggle as demand remained weak.

Gold bullion, by contrast, still has a very constructive outlook in the medium- and long-term.

Figure 1. Gold Bullion is Consolidating Below the Last Significant Resistance Level Before a Re-Test of Previous Highs

- Source, Sprott Monthly Report, read more here