Merger Monday Shine Tarnished by FOMC Speech
On Sundayevening, Global miners Barrick Gold (ABX) and Randgold Resources (GOLD) announcedthey have agreed to merge in an all share, no premium transactionwhich will solidify Barrick as the world’s largest gold company by production.The street reacted very favorably, as the share prices of both firms were bidhigher combined with 52-week high volume.
I reachedout to a few junior explorer executives for their thoughts on the merger andthe positive aspects the deal may have on the sector going forward.
AurynResources (AUG.TO) Executive Chairman Ivan Bebek, who has over 18 years ofexperience in financing, foreign negotiations, and acquisitions in the mineralexploration industry said; “(This is a) Great indicator of the bottom. Thesetypes of mergers usually happen at the top or the bottom. The rumor inDenver was that the only way Barrick could get Bristow as CEO was through thedeal. Certainly, a shakeup across the industry.”
Revival Gold(RVG.V) President & CEO Hugh Agro, who is the former Executive VicePresident, Strategic Development with Kinross Gold Corp. had this to say; “Certainly,we can expect a number of follow on disposal transactions as theBarrick-Randgold portfolio is optimized following the merger.” Mr. Agrocontinued, “The Barrick-Randgold transaction is good for our industry. It willsurface value in the Barrick portfolio. It should attract generalists’investors to the space and it will lead to a recycling of assets in an industrythat has limited “seats on the bus”.
Unfortunately,the industry excitement over the merger was dampened a few days later when the marketreaction to the FOMC continuing forward with its rate-hike dot plot was tocontinue selling gold. Although the Fed dropped longstanding language from itspolicy statement on Wednesday saying its monetary policy "remainsaccommodative", gold was not responsive to this omission. The removal ofthat phrase suggests the Fed could even pause at some point to assess theeffect of its actions on the economy and gold’s non-reaction to this was a hintof further selling, which followed yesterday.
Anotherominous sign of gold possibly heading lower is its non-reaction to thebreakdown in the US dollar last week. The greenback had broken the neckline ofa head& shoulders top at 95 in the daily Cash Settle Index with atarget below 93, yet gold failed to react to this glaring weakness. Gold’s nowsix-month decline has been mostly attributed to a rising US dollar. The worldsreserve currency had also been the recipient of safe-haven buying, as opposedto the traditional role gold has historically played in that regard. Bullionnot reacting positively to a weak dollar is concerning, to say the least.
Technically,December Gold has failed to have a weekly close above $1211 during thisconsolidation after the over-night spike low near $1160 in mid-August. A weeklyclose today below $1194 in the December contract will set up a double bottompossibility below $1170 and would be a hint of the U.S. dollar rally resuming.However, a quarterly close below $1200 next Friday could send bullion down tostronger support at the December 2016 low of $1125 in the medium term.
Meanwhile, Ifeel the relative strength in the GDX since the low made on September 11th, canbe mostly attributed to two factors. The VanguardPrecious Metal Fund restructure being completed and the recentstrength of the Barrick/Randgold combined weighting in the Van Eck global minerETF Portfolio being over 12%. After traders ceased fading the Vanguardrestructure by covering their short positions and the fund manager finished sellingits shares, both the globalminer ETF and silverhave been outperforming gold since the GDX printed $17.28 earlierthis month. Platinum has also been showingrelative strength recently towards gold, which has been anothershort-term bullish factor for the miners.
Nevertheless,it remains to be seen how gold stocks will hold up if we indeed get a quarterlyclose below $1200 in December Gold at the end of next week. Although tax-lossselling has begun early in the sector this year, we may continue to see more ofthis selling in the mining complex heading into the next FOMC meeting inNovember. Caution is still advised and a large cash position in your juniorresource stock portfolio is recommended. Stop by my website at www.juniorminerjunky.com and sign up to be on the free email list. You will receive this column in yourinbox each week, along with interviews and updates on my subscription serviceavailability.
By David ErfleContributing tokitco.com
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