Capitulation Begins in the Mining Complex
The “summerdoldrums” have been particularly cruel to gold bulls this year with safe havencapital continuing to rush into the U.S. dollar, as opposed to the traditionalsafe haven of gold. There has also been speculationthat Turkey may be having to sell gold recently due to their current severefinancial crisis, which would explain the acceleration in bullion’s declinethis week. After the GDX lost critical support last Friday at the $21 level,the mining complex began to experience capitulation selling on Monday morning. Theglobal miner ETF sell-off accelerated into a waterfall decline on Wednesday andis now targeting technical support at the $16 level.
Meanwhile,last week’s Commitment of Traders (CoT) report showed large speculators andhedge funds being short gold by enormous amounts, which continues to set anall-time record net-short managed money position for three weeks running. Thenet-spec position declined to 5.6% or 25K contracts, which is in historical majorbottom territory. Since there is no immediate catalyst on the horizon for themetal of kings, the higher this managed money short position runs, the inevitablemean reversion becomes potentially more explosive once a catalyst materializes.When acommodity has a record short position, it will ultimately have record buybacks.
Furthermore,the commercial “hedgers” have been closing out short positions and by now maybe getting close to zero. Commercials have a much better track record thanspeculators in the gold market and a short position close to zero, like we sawin late 2015, is a sign we are near a major bottom. The CoT report is releasedeach Friday but only contains Tuesday’s data, so there is a three-day lagbetween the report and the actual positioning of traders. This means the futurestrading information from Wednesday’s big sell-off will not be included in thisweek’s CoT release, issued today at 3:30pm EST.
Marketsentiment is also becoming extremely bearish with the Percent Bullish amongnewsletter publishers, tracked by Consensus-inc’s“Consensus Bullish Sentiment Index” , recently dropping to24% - thelowest it’s been since 2004. Moreover, the Gold Miners Bullish Percentage ($BPGDM)Index is down below 17% bulls this week as well.
Based on the recent CoT report and sentimentresearch, the gold market is a rocket on the launchpad, waiting for ignition.However, we will need to see a fundamental catalyst before the recordspeculator short position in gold futures begins to be unwound.
Short term, the biggest potential catalystwould be a reversal in the U.S. Dollar. The euro has become very over-sold withconcerns about European bank losses due to their exposure to Turkey. Althoughthe Turkish lira continues to recover some of its recent losses, the euro has yetto move much above support at the $1.13 level in the $XEU. An overdue bounce inthe euro would reverse the rise in dollar and therefore, relieve some of thepressure on gold.
Another possible near-term catalyst could be ade-escalation of trade tensions between the U.S. and China. A Chinesedelegation will travel to the U.S. for trade talks in late August,China's Ministry of Commerce said on Thursday.
The $1180 level has been breached when astop-run was triggered below $1200 gold this week, bringing $1140 into play ifwe close below $1200 on a weekly basis today in the December contract. Theminers have been selling off much more than gold this week, which tells me $1140may come into play early next week. The bad news is the waterfall decline inthe GDX could see a $16 handle before bottoming soon, so caution is stilladvised even though the complex remains deeply over-sold. The good news is capitulationselling in the miners this week is bringing the sector closer to a majorbottom.
Since gold lost $1260 on the June MonthlyBasis close, I have advised my subscribers and KorelinEconomics Report listeners to avoid optionality plays, silverproducers, and high-cost gold producers until the gold price can re-claim the$1300 level. If you need assistance in choosing the best precious metal juniorsto invest during this capitulation sell-off in the complex, stop by my websiteat www.juniorminerjunky.com and check out the subscription service.
By David ErfleContributing tokitco.com
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