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What Will It Take for Metals to Break Higher?

Published 02/19/2024, 11:23 AM

Gold and silver prices remain range bound and investors are frustrated. Precious metal mining shares have been drifting lower for years.

The VanEck Junior Gold Miners ETF (NYSE:GDXJ), an index of junior mining companies, is at the lowest level seen since the depth of the COVID sell-off in early 2020.

Bullion has outperformed the mining share indexes, but sentiment in the physical markets has still suffered. In order to get higher metal prices, the sector is going to need more love and less hate from investors.

Let’s examine some of the events which could get prices moving – either higher, or lower.

The first is the much-anticipated Fed pivot back toward lower rates and easier monetary policy.

Jerome Powell and the FOMC have been able to hold rates higher for longer than many anticipated.

They have been given extraordinary cover by strong performance in the stock markets and almost unbelievable government economic data. Reports on employment and GDP seem almost disconnected from reality.

The data paint a suspiciously rosy picture, which doesn’t seem to match the lived experience of most Americans. It has, however, been enough to keep investors from hitting the sell button for stocks.

The narrative that all is well with the US economy is getting a bit harder to maintain. There are plenty of voices warning about an impending recession.

That said, it is an election year and no doubt the bureaucrats behind the economic data are getting pressure to keep the story going.

If recession fears win out and sustained selling finally hits the stock markets, the political pressure on Powell and the FOMC will be enormous.

Should they pivot, the move should weaken the US dollar in foreign exchange markets and, at long last, that foot could be lifted from the neck of metal prices.

Another potential catalyst for gold and silver prices is round two of the commercial real estate crisis in U.S. banks.

The Fed’s Bank Term Funding Program, which allows banks to borrow against their inventory or underwater bonds at 100% of par value, is scheduled to end in March.

The conditions which necessitated the bailout program, have worsened over the past year rather than improved.

Troubles in the commercial real estate sector are still growing and the unrealized losses in the bond portfolios and bank balance sheets are still there.

Small and regional banks stocks have begun moving lower once again, in anticipation of the program’s end.

If what happened in round one of the crisis is a guide, demand for gold and silver will spike as at least some depositors look for an alternative place to park some of their savings.
Metals prices might also respond if kinetic war should break out with Russia, China, and/or Iran.

Presidential politics may also serve as a driver for metals prices. The election of Donald Trump proved to be a curb on retail demand for gold and silver in 2016. Bullion investors skew conservative, and many believed Trump would solve a lot of problems. Demand for metal as a safe haven fell.

The same phenomenon is probably having some impact on demand today. Trump is rising in the polls, and Biden has been falling. While demand for bullion is above 2016 levels, it has fallen significantly in recent months.

Another catalyst to consider is price action itself. If metals can decisively break out of the price range where they have been mired for the past few years, the improved technicals and change of trend will draw some attention.

Such a breakout might involve another catalyst, such as a pivot at the Federal Reserve, but that isn’t required. Few things can lure speculators back into the market like higher prices.

Speculators have been building a heavy short position in recent months. They won’t go long and commit to a position there until silver breaks above $30 and gold pushes through, and holds, above $2100. Preferably, both metals would break overhead resistance together and thereby confirm each other’s move.

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