By Jim Donnelly, Olson Global Markets
After rebounding sharply off of long-term trend line support at 82.29 on June 26, the Philadelphia Gold & Silver Index (XAU) is in position to extend much higher. From a technical point-of-view, monthly stochastic studies have just crossed up bullishly and remain in an oversold condition despite the sharpness of the rebound. This suggests that the upside in gold and silver from current levels could be impressive.
Another thing to consider is that a number of well known hedge fund managers have reduced their long positions in gold and silver, gold and silver EFTs and/or mining shares …as prices declined. That liquidation has removed a healthy amount of overhead supply that could have had a limiting impact on upside gains. Further, a number of gold and silver miners have cut back on production, cut staff, reduced dividends and sold off properties in order to preserve cash. These maneuvers will likely reduce the amount of newly-mined gold and silver from coming onto the market if future months as well.
Another issue to assess is the recent evidence that the jump in interest rates since May 22 has already had a dramatic effect on retail store consumption as well as new home sales. This combination of events suggests that the much anticipated Fed taper might be pushed off onto the proverbial back-burner.
Worries that the implementation of Obamacare could lead to full-time workers finding their hours cut, thus reducing net disposable income, may also have an impact future domestic consumption demand. Moreover, the head of the International Monetary Fund, Christine Lagarde opined last week that a reduction in the amount of QE by the Federal Reserve could augment harmful financial implications for some emerging market economies. As a result, pressures on the Fed to hold policy steady, as well as a potential call for future fiscal stimulus might emerge heading into the debt-ceiling debate. These conditions might partly be to blame for the recent decline in U.S. dollar index (DXY) despite the rise in interest rates.
These kinds of uncertainties usually result in lower equity prices but a bump up in the value of precious metals. In the case of the XAU, major trend line resistance doesn’t come into play until a test of the 142 area, which is 27.4% higher than the 111.39 close on Friday.