INFLATION PLUS DEFLATION WILL IGNITE PRECIOUS METALS IN 2021
We expect to see Inflation in the short to intermediate term impacting disposable income in the form of; increased taxes at all levels of government, Covid-19 retail and services 'surcharges', rising interest rates, higher import costs & food costs. On the other hand we expect to see increased deflation during the same period due to a decreased wealth effect, a temporary slowing rate of government liquidity injections and weak consumer demand due to unemployment and rising bankruptcies. All of this will be negative for precious metals in the immediate near term but will set the stage for the next major leg up Precious Metals in the first half of 2021.
Gold stocks are still in a consolidation / correcting after soaring to seriously-overbought levels when their last upleg peaked in early August. Weak seasonals in the next month could additionally accelerate that. The deceiving high level consolidation after that euphoric topping failed decisively this week when GDX shattered its 50dma, proving this sector's correction is alive and well. Only about 15% so far, it is likely to extend to 25% to 30% before overbought technicals are worked off and sentiment rebalanced. Seasonality is likely to exacerbate the remaining selling.
WE ARE PUTTING IN THE GOLD "HANDLE" WE CALL FOR
We have witnessing a $150 drop in gold prices, a $7 drop in Silver and headline-grabbing volatility since our August UnderTheLens Newsletter when we warned of a coming drop in Gold & Silver Prices:
Gold and silver are extremely overbought today. Popular sentiment has grown greedy and euphoric, with fear-of-missing-out buying flaring dramatically. That has forced both gold and silver to very stretched levels relative to their baseline 200 DMA's. Such extremes have warned of up-legs topping in these bull markets, heralding re balancing selloffs. These essential selloffs erupting periodically in all bull markets should be embraced. They offer the best buy-low opportunities ever seen within ongoing bulls. They also keep bulls healthy.
Never forget, Gold is notoriously volatile and 25% corrections are historical norms! Though we don't see this level of corrective / consolidation, we do fully expect a near term corrective / consolation to soon occur.
There's a finite amount of capital available to chase any upleg, adding to its gains. When greed grows potent enough to fuel widespread fear of missing out, much buying is pulled forward from coming weeks and months. That soon exhausts available capital firepower to keep driving prices higher, leaving a void of demand. With enthusiastic buyers effectively all-in, the balance of capital flow power shifts to sellers.
We also suggested that the correction would be part of a "Cup & Handle" Pattern Formation". We still feel this to be the case since we are additionally seeing this pattern formation in Real Terms (See below).
A STAGE SETTING CORRECTIVE CONSOLIDATION
The current weakness in Precious Metals is to be expected and will present Buying opportunities for the patient, long term investors. Precious Metals have patterns that long term precious metals are well aware of. We feature one in Addendum #3 below.
AUGUST UnderTheLens Video