David Erfle 

Friday June 23, 2017 13:57

In the Federal Reserve’s perfect world, the Feds fund rate would permanently remain between 2 and 5 percent, which would be the “sweet-spot” that maintains a healthy economy. This ideal economy would have gross domestic product (GDP) growth between 2 and 3 percent annually and an unemployment rate below 5.75%. Price increases would also remain below the 2% core inflation rate.

Unfortunately, we do not live in a perfect world, so on Dec. 17, 2008, the Federal Reserve Open Market Committee (FOMC) lowered the Fed Funds Rate (FFR) to 0.25%. This was the tenth consecutive rate decrease and was subsequently held at this historic rock bottom level for the next seven years. During this time span, gold sector participants were treated to both a blow-off move higher, accompanied by a nearly 50% move lower as the GDX lost 85% of its value by the time a solid bottom was put in place.

The gold price zoomed from $700 in late 2008 to the $1900 level by September 2011, only to crash down to the $1050 area in late 2015 with the FFR at basically zero the entire time. In fact, the gold sector did not begin a significant move higher until a month after the FOMC raised rates in December 2015, beginning the first rate hike cycle since June, 2004 through June 2006.

What did the gold price do during the two years of the last rate hike cycle when the Fed raised rates from 1.00% to 5.25%? Bullion rose along with the FFR from $400 to $725. In fact, the FOMC hiked 17 consecutive times at each meeting while gold just kept moving up with the FFR.

Likewise, the FFR in July 1976 was at 4.75%, while the gold price was bottoming at the $100 level. The FFR rose to 14% by January 1980 as bullion raced to $850 in less than four years, right along with historically high interest rates.

What we can learn from these historic similarities of rising rates being bullish for the gold sector is that higher interest rates assist in reviving inflation for the future. This is what the market has begun to price in after the bear market in the miners ended on January 19th in 2016.

Last week the Fed raised rates 25-basis points for the fourth time since December 2015. After initial knee-jerk selling is over, the gold sector has moved higher not long after each rate hike, so I do not see any reason why it would be different this time.

While the gold price is still not technically in a bull market, many of the quality miners have remained in bullish uptrends since early last year. The gold price needs a solid weekly close above $1375 before the yellow metal can be deemed as technically being in a new bull market. However, many of the best in class junior miners have already made 4 year highs, boasting share prices which have continued to make higher highs and higher lows.

A little over four years ago, in early 2013, the gold price lost the $1500 level which ushered in capitulation selling in the miner sector. Many of the quality miners having made 4 year highs with gold still $250 below this level is very significant as the miners historically lead the gold price.  

The miners’ consolidation of the 179% impulse move from mid-January through early August 2016 has now entered its 11th month. The last miner shares to correct during long consolidations are usually the quality companies which led the sector since the correction started. This began to happen after the FOMC raised interest rates last week, as many of the quality junior miners I track have been correcting towards their respective 50-week moving averages, which has been a major support level since early 2016.

As I pen this missive, the GDX is attempting to hold support at the $22 level, while the gold price is attempting to bounce off $1240 support at its 200-day moving average. I am still looking for a strong close above the $25-$26 area in the GDX before the miners can begin the next leg higher. Meanwhile, gold would be very bullish if it can close back above $1265 when Q2 ends on June 30th.

On the downside, $1240 gold needs to hold, along with the strong support level of $20.89 on the global miner ETF heading into quarter end next week. If these levels are breached on the quarterly close, the miners could see more selling pressure as we head into the summer.

Since the $22 level in the GDX held last week, I have been adding to a few of my existing junior miner positions on weakness. If you require assistance in pinpointing the best miners to be invested in going forward, please stop by my website and check out the subscription service at www.juniorminerjunky.com.