Referencing one of our main themes for the last half a year, the case for the gold sector is supported by the case for economic deceleration. It is not supported by inflation, as in the recent bounce in inflation expectations as the US dollar declined.
The gold sector often rises with inflation expectations as silver out performs gold and so do commodities. But the gold sector’s fundamentals are fed by counter-cyclical activity and today’s payrolls report was right in line with that. In the ‘pullback’ update on Wednesday we also noted that the ‘gold ratio’ macro indicators remained positive as well…
“The precious metals were due to pull back and here is a pullback. Please review this morning’s post for a look at how the macro market is setting up for the gold sector’s next bullish phase.”
On the technical side, while the sector was pulling back we reviewed several pullback points. On the short-term, the first anticipated pullback level at the EMA 20s turns out to have contained the pullback. The EMA 20 is the orange dotted line on the GDX chart and the blue lines on GDXJ and SIL. This keeps the next target of HUI 251 in play. Higher highs would increase the odds further.
The sector remains over bought on weekly time frames and generally over bullish, but the pullback earlier this week was the harshest yet. These short-term pullbacks have served to reload new advances.
Volatility will probably increase now that a bull market is confirmed. But as long as macro indicators like economic weakness (and several others we will continue to follow) remain intact to constructive, pullbacks will be buying opportunities within a bull market that is now launched. Some will be harsh and brief like the one this week and some will be severe. But the gold sector as a whole continues to sit pretty from a macro fundamental standpoint, assuming gold is again rising vs. assets positively correlated to economies, as it appears to be doing once again.