Yesterday’s weaker-than-expected US CPI reading strengthened the market's belief that the Federal Reserve may be making a policy mistake if it doesn’t step away from its “nowhere near normal” stance on rates. Together with a bounce in bonds as stocks continued lower, this narrative helped trigger the biggest one-day rally since June 2016, when the Brexit vote in the UK shocked the market.
Gold has now cleared the first hurdle of resistance at $1,210/oz but in order for this to be more than a weak correction within a major downtrend it needs at a minimum to break above $1,238/oz, the 38.2% retracement of this years sell-off.
The break above $1,210/oz this week has changed our short-term view from neutral to bullish. A continued focus on stock, bonds, and growth weakness and the potential of the dollar running out of steam could see the metal embark on a recovery towards $1,300/oz, our year-end target. Much still depends, however, on the overall market sentiment, which has been rattled by rising rates and falling stocks. A correction over the coming days following Thursdays strong gains need to be halted ahead of $1,210/oz in order for this improved technical outlook to take hold.
While the S&P 500 was down 5.4% Thursday and heading for its worst week since March, the VanEck Vectors Gold Miners ETF (GDX) was up 6.5%, its best week since January 2017. The exchange-traded fund tracks the performance of and invests in materials stocks of all cap sizes across the globe. Its largest allocation is in North America with Newmont Mining Corp. and Barrick Gold Corp. accounting for close to 20% of its exposure.