Gold Breaks Down as Miners Increase Relative Strength
Since goldbottomed at the $1050 region in late 2015 many analysts, myself included, havebeen anticipating a breakout above strong resistance at the $1375 level. However,this past April the yellow metal failed for the third time at this area and hasnow broken down with a monthly basis close below critical support at $1260 onJune 29th. Furthermore, bullion had its worst quarterly performancesince Q4 2016 and is entering a new quarter after having thoroughly establisheddownside price momentum for the first time in eight months.
Gold is currentlybouncing off its 50-month moving average and uptrend line support from the 2015bottom around the $1240 region, so many are expecting a strong move higher thismonth. Nevertheless, there is a confluence of resistance at the $1300 - $1310area which needs to be broken on this bounce, or we may see gold eventually selldown to the next level of support just above $1200. Trading decisions are oftenmade based on trendline support levels and gold has a habit of historically whipsawinginvestors out of position.
The recentstrength in the U.S. dollar has made gold an unattractive option in the globalflight to safety. Since the trade tariff dispute involving the U.S., China, andnow the EU, began last month, investors have been increasingly turning to thedollar as a safe harbor while selling both gold and equities. However, theworlds reserve currency has stalled at 95 for six weeks running, which is strongresistance at the 200-week moving average on the Cash Settle Index. The dollarrolling over from this level could weaken gold's currency component enough toallow the metal to commence a rally.
Meanwhile, miningstocks are showing increased relativestrength vs. gold and the GDX has remained firmly above criticalsupport at $21. The continued bifurcation of gold royalty companies has playeda major role in the outperformance of the global miner ETF and global royaltyfirm Royal Gold (RGLD) is trading at an all-time high this week. I have alsoseen many of the quality juniors, which I own and/or follow, attempting tobottom the past few weeks while a few are trading at, or near, their respectivemulti-year highs. Earlier this year, when gold was threatening to breakout, theGDX was lagging and with gold now breaking down, the ETF has been increasingits relative strength in relation to the metal. So, I would not be surprised tosee the GDX breakout above long-term resistance at $25 once the gold priceregains a solid $1300 floor.
Moreover, earlystage success continues to be rewarded and juniors who control large,high-margin deposits continue to trade higher, or are being taken over. The recentsurge in mergers and acquisitions is reason to remain patient if oneis holding positions in gold stocks which are trending higher, despite therecent weakness in the metal. However, higher cost miners, along with juniorswho are working on lower grade bulk tonnage systems, should be avoided untilthe gold price rises back above $1300 and makes a solid floor above this level.
July hashistorically been a good month to buy quality juniors, as most trade on thinvolume while many sector participants are on vacation. Recently, there havebeen many quality junior resource stocks being sold by impatient investors,creating opportunities for speculators with cash and patience. It takes a lotof time and effort to find these opportunities and it is best to be on the huntfor them when the gold space is out of favor. When this sector turns, the stockprices in the quality issues can move up quickly, so if you require assistancein choosing the best quality juniors to invest, please stop by my website andcheck out the subscription service at http://juniorminerjunky.com/
By David ErfleContributing tokitco.com
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