GDX continues bullish consolidation into Q4 earnings week

Gold futures broke down earlier this week as sentiment towards risk-on assets has become much improved. With U.S. President Donald Trump being acquitted of both impeachment charges in the Senate this Wednesday, along with the coronavirus fears easing a bit, the S&P has now formed a bullish “island reversal” pattern on a daily basis.

After opening the month of February with some selling on Monday, April Gold broke down significantly during the next trading session and quickly ran down towards support at the $1550 level. Although the fear-based buying in gold has diminished, economic concerns have thus far been instrumental in maintaining this former long-term resistance level.

With interest rates still attempting to push higher driven by the rising concern over credit ratings, the Fed remains trapped in supporting the Repo Market to prevent short-term rates from rising. The repo rate has crept back up to 1.59% and demand has suddenly exceeded supply once again.

Meanwhile, starting on February 3rd, the People’s Bank of China (PBOC) injected $174 billion in liquidity following the Fed. And the Bank of Japan (BOJ) has vowed to buy all government bonds with no limitations, along with the European Central Bank (ECB) remaining trapped into 5 years running of negative rates and 11 years of QE.

Although gold futures managed to close above $1570 on a monthly basis last Friday, the GDX continued relative weakness, along with silver, was warning the recent fear-based move higher in the safe-haven metal would not be sustainable in the near-term. While gold and gold mining equities typically trade in tandem, they sometimes diverge from one another when a sharp move higher in bullion has been fear-based.

Moreover, silver is the commodity that tends to be the most sympathetic to extended rallies in the gold price. But for the last few weeks, silver has failed to keep pace with gold and has even begun diverging lower against the yellow metal. Silver’s industrial component has been under the same selling pressure that is being exerted against an increasing number of commodities, due to fears of slowing global growth.

Meanwhile, the GDX continues to consolidate last year’s gains well above strong support at the $26 level, where the 50-week moving average is creeping towards. This region also coincides with lower weekly Bollinger Band support. The global miner ETF has thus far remained in a nearly 6-month bullish consolidation triangle, with declining volume, after bouncing off its 18-week moving average and up-trend line support on Tuesday. Triangles can be either a continuation pattern, if validated, or a powerful reversal pattern in the event of failure to the downside. 

With Q4 2019 miner earnings season on tap next week, I expect most producers will show they have continued to generate strong free cash flow, which may be enough to break the triangle consolidation in the GDX to the upside soon. Gold prices averaged $1,483 per ounce in the quarter, up 0.6% quarter to quarter and 21% year over year.

Additionally, Q4 tends to be a seasonally strong quarter from a production standpoint and sector analysts are forecasting a 9% average production growth for the senior producers, with mixed results expected among the intermediate and junior producers. Early into the new year, gold is up 2% and gold equities are down 1% (in USD terms), with many of the intermediate and junior producers being down by over 10%.

This consolidation has been even more frustrating for the higher risk junior equity investors, as the sector has been stagnant while capital markets remain skeptical of this recent move in gold creating a new floor at $1500, let alone $1550. According to a new report by private capital tracker Preqin, fundraising for mining and metals investment slowed dramatically in 2019, falling to an eight year low.

It is important to remember that developer and exploration junior resource stocks have zero grounding in traditional valuation metrics, while never making a profit. This very high-risk sub-sector of the precious metals complex requires management to constantly raise money via stock dilution and developer/explorers are valued based on the pulse of the market and investor sentiment.

Gold has been bottoming for more than six years, while risk-on sentiment continues to power general equities to all-time highs and the cannabis and crypto sectors have been attracting most higher-risk capital investments. With the equally high-risk mining complex having been a lackluster performer, up until recently, junior investors are still ever mindful of the previous cycle’s dramatic conclusion. The brutal bear market from 2013 to late 2015 was responsible for seeing much of their capital disappear, which has kept many resource stock speculators on the sidelines.

Thus far, during this new gold bull, generalist investment has been directed towards precious metal’s ETF’s, along with more liquid global miners and royalty stocks. However, there have been several huge junior winners over the past few years for seasoned sector speculators picking the best in breed precious metal juniors.

At some point in the near-future, we will see this tiny sector begin to outperform the GDX in a big way once speculative fever hits the entire precious metals complex. Therefore, more patience is required while accumulating and maintaining positions in quality juniors that remain deep value speculations with huge leverage to the gold price.

Over the past few years, I have positioned Junior Miner Junky (JMJ) subscribers in the best in breed precious metal juniors well ahead of the breakout in gold last year. The real money JMJ junior portfolio is up over 150% since its inception in 2016. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.

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