Gold and silver failed to continue their breakout and dropped back towards support today. There were two mains reasons for the decline in precious metals:
#1: FED chair Janet Yellen made some bullish comments in her testimony today, suggesting that the economy is on the mend. This makes gold and other safe-haven assets less attractive. Of course, Q1 GDP growth was just 0.1% versus expectations of 1.2%. And while the unemployment rate dropped, the labor force participation rate also dropped to its lowest level since 1978. Over 100 million working-aged Americans are unemployed. In China, the manufacturing index came in lower than expected with the fourth straight month of economic contraction. So, why exactly is Yellen upbeat? Or is it just a cheerleading position?
While quantitative easing may be showing signs of diminishing return, it has certainly been a boon for Wall Street. Unfortunately, citizens are seeing the same return for all those taxpayer dollars use to shore up the big banks. Yellen might have a hard time explaining this chart to the citizenry.
#2: Putin said that Russia withdrew some 40,000 troops from the border with Ukraine and gave signals that he favors a de-escalation of the crisis. This was somewhat unexpected, as many believed Putin was likely to invade following the killing of over 40 ethnic Russian in Odessa. Putin is a hard man to read and it is difficult to decipher exactly what he intends. For all we know, he may be giving mixed signals in order to launch a surprise invasion of Eastern Ukraine. I hope the situation does indeed de-escalate, but I am not holding my breath.
The technical chart shows that support above $1,280 held up today and the upward-sloping trend line remains intact. $1,280 is relatively strong support, as it has been both support and resistance on multiple occasions over the past year. Furthermore, gold remains above its 100-day moving average of $1,284 and just below the 200-day moving average of $1,300. The next level of support is at $1,180 and resistance is around $1,320. The opposing trend lines are converging, suggesting that a significant move in either direction may be imminent. My bias remains to the upside.
The net takeaway is that gold’s decline today was driven by hot air from Janet Yellen and the perception of de-escalation in Ukraine. I don’t believe these forces will be strong enough to drag the gold price below support, but much depends on the highly leveraged trading on the COMEX and investor sentiment. Fundamental factors remain bullish, with a continuation of strong demand from central banks and Eastern nations. Furthermore, both gold and silver should continue to find support around their respective AISC (all-in sustaining production cost), where the industry average is just below current pricing.
Current Sentiment and #1 Gold Stock for 2014
My short-term sentiment is neutral, but I believe in the long-run we will look back at current pricing as an excellent buying opportunity. I have not added any new positions to the GSB portfolio in the past two months, but have cash on the sidelines awaiting a buy signal.
Our most recent portfolio addition was in the green today, despite the sharp drop in precious metals. This stock is up roughly 80% year to date. The company DOUBLED production during the first quarter, reduced their AISC to under $1,000 and reported positive net earnings of $5 million despite the depressed gold price. The company has a market cap just above $300M, yet is expecting production of around 180,000 ounces of gold in 2014. Management is top notch and they operate in one of the safest jurisdictions in the world. Even if gold remains rangebound for the remainder of the year, I still expect their share price to appreciate significantly.
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