The Debt Ceiling Deal and the Price of Gold
The debt ceiling deal is (obviously) done. What are the consequences for the price of gold?
Will gold go parabolic?
Truth be told, though, there’s not that much to write because what we saw on the market on Friday took place in exact tune with what I wrote previously.
Here’s what I wrote in Friday’s huge Gold Trading Alert about the recent gold price performance:
Gold just broke below its rising, medium-term support lines, so it would be quite natural to get back to this line, verify the breakout, and then decline once again. It seems that this is what is taking place in today’s pre-market trading.
Then again, given how far gold rallied ignoring the fundamental reality of higher real rates, it could fall much more before it corrects.
If we see a combination of meaningful bullish signals and it seems that going long is a good idea, as always, I’ll keep my Gold Trading Alert subscribers informed.
And here’s what happened:
Gold did exactly that. It moved back up and then down again. Let’s zoom in to see it more clearly.
The volume was low, and one can say that it was due to the long weekend, but it could be simply because the move higher was a pause and not a real rally.
While gold verified its breakdown, silver moved higher in a much more notable manner.
Gold ended the day 0.03% higher (so, it was practically flat), but silver moved higher by almost 2%, which tells you a lot about silver’s very short-term outperformance.
Gold futures are up in today’s trading, but it’s not necessarily believable since it’s the market holiday in the U.S. today, and without the U.S. trading, price moves are not trustworthy because the U.S. is such a large market.
Today’s upswing in gold futures might be just something to trigger stop-loss orders from those in short positions, taking them off the market right before a slide materializes. Let’s keep in mind that for a stop-loss order to be activated, the exchange where it was placed would need to be open.
The S&P 500 futures were up somewhat, and then they moved back down.
This is another attempt to move to new highs, and just like many previous attempts were invalidated, this one is likely to share the same fate.
The debt ceiling deal is done, just like I wrote previously. It was obvious that it will be reached, but some investors were still positively surprised, and the market rallied.
Interestingly, two headlines that I saw on Yahoo! Finance today were about the debt ceiling deal being done and that it is actually a bearish thing down the road due to the limited spending.
This might indeed be the tipping point for the stock market and for other markets, but not for the reason that is often listed. I’d say that it might be due to the main motivation behind many (all?) politicians’ actions: gaining political capital and avoiding blame.
If The Powers That Be know very well that stocks are going to have to slide eventually, then they would prefer to make sure that nobody in high places is “rightfully” blamed. And wouldn’t it be nice and convenient, if the stock market plunged right after a deal is done to avoid country’s default? Surely, the politicians did everything they could, right?
Anyway, some other articles on the same website pointed to how expensive everything currently is. In other words, inflation. And yes, it remains to be political, so those banking on lower interest rates soon, are in for some bearish surprises.
Let’s take a look at the hourly chart featuring the GDXJ (proxy for junior mining stocks).
The self-similar pattern continues, and if it is to continue some more, we’re likely to see some back-and-forth movement in the very near term and then another move lower.
Given gold futures’ move higher, it seems quite likely that junior miners could move a bit higher and then continue their decline.
The medium-term outlook for the precious metals sector (and for the FCX) remains to be extremely bearish, and the profit potential for short positions in junior miners and FCX remains enormous. While I can’t promise any kind of return (nobody can), in my opinion, the recent profitable position in the FCX will soon be joined by even more profits, and the winning streak of trades that started in early 2022 will continue.
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Przemyslaw K. Radomski, CFA