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SX Gold & Metals Advisor
Profitable Investing in Mineral Resources

June 23, 2021

Gold and the precious metal mining stocks are rallying on short covering after reaching an extremely “oversold” market condition earlier this week. August gold is up just 0.80% from last week’s low as of this writing—admittedly nothing to write about—but what is worth mentioning is an article I came across which expands on a theme that was touched on in the last report.

Dollar “Short Squeeze” Likely Reason for Gold Pullback
Gold and the precious metal mining stocks are rallying on short covering after reaching an extremely “oversold” market condition earlier this week. August gold is up just 0.80% from last week’s low as of this writing—admittedly nothing to write about—but what is worth mentioning is an article I came across which expands on a theme that was touched on in the last report.

Writing for the Asia Times, David Goldman penned an editorial entitled, “The enduring triumph of Chimerica” (which he defines as the “symbiosis of an American economy that borrows and imports with a Chinese economy that lends and exports). Goldman’s thesis is that China “appears to be intervening in the foreign exchange market to prevent its enormous trade surplus from driving down the dollar’s exchange rate against the Chinese renminbi (RMB), and then reinvesting the proceeds of intervention in American money markets.”

Specifically, Goldman says China is investing in U.S. Treasuries which effectively “pays the bill” of U.S. fiscal stimulus. He also contends that this explains several recent market anomalies, including the plunge in China’s currency and the recent drop in the inflation premium built into U.S. Treasury notes “despite a sharp rise in the price of oil, which normally tracks the inflation premium.”

What Goldman’s take on the recent dollar index rally (and gold price decline) boils down to is that Chinese companies own a lot of U.S. dollar-based debt. Thus, as the greenback rises in value against other currencies and commodities, China’s debt burden grows along with it. This in turn would make it in China’s best interest to periodically “short squeeze” the dollar in order to temporarily relieve inflationary pressures in the U.S.

And that, according to Goldman, is likely what happened last week when the dollar index rallied and precious and industrial metals dropped. Whether Goldman’s explanation of these events is correct I can’t say for certain. But it does tie some loose pieces of evidence together very neatly—including some of the evidence we’ve been looking at in recent reports.

That said, the intermediate-term (3-9 month) fundamentals still favor a bullish commodity environment, including for the metals. Global manufacturing is still on the rebound, and with it, higher demand for key industrial inputs like copper, aluminum, iron ore and steel.

Then there is gold’s “fear factor” to consider, which should keep bullion prices fairly buoyant in spite of the recent weakness. Simply put, there are too many worries surrounding the global economic recovery and geopolitical outlook, and this in turn will likely translate into continued safe-haven demand for gold and other precious metals.

Suffice it to say, I view the recent gold market weakness as being the temporary result of a dollar “short squeeze” and not the start of a new bear market.

From a short-term technical perspective, gold and silver are still “oversold” based on several price oscillators and overbought/oversold indicators (including my favorite one, the 20-day oscillator, shown below in the SLV chart). Moreover, there’s also a rather conspicuous gap visible in the daily chart of the iShares Silver Trust (SLV) which begs to be filled—and likely in the very near term.

However, while additional short-covering rallies are certainly possible in the coming days, I’m not formally recommending any new positions in our favorite metals-tracking ETFs until we have a confirmed bottom in place. The U.S. dollar index is still too elevated for my liking, and the gold and silver ETFs are still below their key short-term moving averages, so we’re not quite there yet.

On the gold mining stock front, I also want to see more improvement before jumping back in with both feet. Right now, my favorite technical indicator for the mining stocks (the 4-week momentum of the new highs and lows for the 50 most actively traded gold stocks) still hasn’t turned up again to let us know that the internal weakness in the gold miners has ended.

For instance, as recently as June 22, 10 of the 50 most actively traded gold stocks made new lows (with three new lows recorded as of June 23). We need to see these new lows shrink to zero while the rate of change (momentum) of the combined new highs and lows turns up.

There are signs of relative strength among the gold stocks, though, and that bodes well for the intermediate-term outlook. Once we get the next confirmed buy signal for the gold miners, the following stocks will likely be among the top performers: Vista Gold (VGZ), McEwan Mining (MUX), Sandstorm Gold (SAND), Western Copper & Gold (WRN), Wheaton Precious Metals (WPM, which we own) and Osisko Gold Royalties (OR).

For now, I have no changes to make to our current portfolio holdings (see the June 22 report) and will provide additional comments with the next regularly scheduled update.