GDX, GDXJ: A Fall Before The Carnage

For example, with FED officials’ hawkish rhetoric contrasting Chairman Jerome Powell’s perpetual patience, a game of ‘will they or won’t they’ is already underway. However, with the FED likely to reveal its taper timeline in September, inflation differentials highlight the regional dichotomy.

Please see below:

To explain, the green line above tracks the year-over-year (YoY) percentage change in the Eurozone Harmonized Index of Consumer Prices (HICP), while the red line above tracks the YoY percentage change in the U.S. HICP. If you analyze the right side of the chart, it’s not even close. And with the U.S. HICP rising by 6.41% YoY in June and the Eurozone HICP rising by 1.90%, the FED is likely to taper well in advance of the ECB.

Furthermore, investors already sense that the writing is on the wall.

Please see below:

To explain, the dark blue line above tracks the EUR/USD, while the light blue line above tracks the Eurozone-U.S. core Consumer Price Index (CPI) differential (advanced by five months). For context, when the light blue line is falling, it means that the U.S. core CPI is higher than the Eurozone core CPI. Moreover, if you focus your attention on the right side of the chart, you can see that the Eurozone-U.S. inflation spread has fallen precipitously. And with the EUR/USD still relatively elevated, there is plenty of room for the currency pair to move lower.

When Will We See the Taper Timeline?

Finally, with investors coming around to our way of thinking, institutions expect the FED to reveal its taper timeline in August or September.

To explain, I wrote on Jun. 16:

While I’ve been warning for months that the FED will likely taper its asset purchases much sooner than investors think, suddenly, the answer to a question that wasn’t even in Bank of America’s Global Fund Managers Survey in April or May has now become the consensus.

Please see below:

To explain, 63% of respondents now believe that the FED will “signal” a reduction in its bond-buying program by either the Jackson Hole Economic Policy Symposium (which is scheduled for Aug. 26-28) or the Sep. 21/22 policy meeting.

Moreover, with a hawkish shift becoming even more popular in July, institutions realized that Powell’s promises are likely to fade with the summer sun.

To explain, 70% of respondents now believe that the FED will “signal” a taper by either Jackson Hole or the Sep. 21/22 policy meeting. As such, while the PMs have been major beneficiaries of the FED’s liquidity splurge, they may experience a September to remember for all of the wrong reasons.

In conclusion, while gold demonstrated relative strength on Jul. 19, silver and the gold miners weren’t so lucky. And with the latter’s underperformance an extremely bearish sign, technical and fundamental headwinds continue to plague the precious metals market. On top of that, with the bulk of their recent weakness occurring alongside the S&P 500 strength, if the general stock market suffers a material correction, the slope of the PMs’ slide could steepen. Thus, while corrective upswings are expected along the way, the PMs’ medium-term trend still remains down.

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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