Miners Continue to Consolidate During Q3 Earnings
Last week, two of Canada's largest gold miners reportedlosses for the third quarter, continuing a disappointing run that has seen theindustry struggle to attract investors. Barrick Gold (ABX) reporteda $412m net loss due to a $405m impairment on itsLagunas Norte project in Peru, while Goldcorp (GG) swungto a $101m loss from a net profit of $111m a yearearlier. These disappointing results were a major catalyst for the breakdown inthe miners experienced last Thursday. Goldcorp lost nearly 20% on the day ofthe release, which has the beleaguered global miner trading below the sectorbottom in early 2016.
In the junior miner space this week, Guyana Goldfields (GUY.TO)share price was cut in half and trading was halted after thecompany released its Q3 report. The junior announced it hasinitiated a review of the underlying resource model and 2018 gold productionguidance was revised downward from 175,000-185,000 to 150,000-155,000 ounces. Thefirm stated the reason for the lowered guidance as being grades have notrebounded as quickly as anticipated in the fourth quarter. Just a few hoursafter the release, the company announced the resignation of Patrick Sheridanfrom its Board of Directors. The share price of GUY.TO was one of only ahandful of junior miners whose share price rose during the previous bear marketinto the end of 2015.
Before Q3 earnings began to come in last Thursday, boththe GDX and the GDX/GLD ratio were flagging a breakout from a bullish 8-weekinverse head & shoulders bottoming pattern on their respective daily charts.Although December Gold has not formed the same technical bottoming pattern, ittoo was flagging the huge move made on October 11th. However, onceglobal miner Q3 reports began coming in last week, the GDX broke down and beganto trend sharply lower with equities as gold remained flat.
Global stocks started the new month on firmer groundafter a brutal October, bouncing the GDX off uptrend support yesterday alongwith precious metals. Gold futures settled up $23.60, or 1.94 percent, at$1,238.60 on November 1st. The move was influenced by a sharpcorrection in the U.S. dollar on the back of a possibleU.S. trade deal with China. Until yesterday's sharpreversal, the world's reserve currency had made a new year to date high on theCash Settle Index into the monthly close.
This morning's Non-Farm Payrolls report (NFP), a keyindicator of the strength U.S. economy, generated a robust 250,000 new jobs inOctober, keeping the unemployment rate at a 48-year low and pushing theincrease in worker pay to the highest level in more than nine years. Thestrongest labor market in decades is powering the U.S. economy that islikely to set a record for the longest expansion ever by next year. Steady workand rising income should influence the Fed to maintain its rate rise dot plotinto 2019, keeping pressure on gold.
Next week, there will be two more sector catalysts withthe U.S. mid-term election on November 6th, which will be followedby the next FOMC meeting on November 8-9th. Since we had a weeklyclose below $19.50 in GDX last week, there is now a possibility the globalminer ETF could test the September 11th low soon. And if that low of $17.28 isbroken, we may see the $15 level before year-end. To invalidate theNovember/December bearish outlook in the mining complex, GDX would have toclose decisively above the $21 level on a weekly basis.
I believe the rash of disappointing Q3 financial reportsbeing issued by some of the global major and mid-tier miners may have broughtincreased managed money short interest into the sector. This possibility,combined with tax-loss selling into the last FOMC meeting on December 18-19th,could place more pressure on gold stocks and test, or possibly break, theSeptember 11th low in the GDX at $17.28. Expectations for a fourthrate hike this year at the December meeting has dropped from 85% a few weeksago to 65% priced into the market, so there is room for this number to risefurther and keep pressure on the price of gold.
In anticipation of this possibly being a false bottom inthe GDX, caution is advised and I recommend a large cash position in yourprecious metal portfolio. Stop by mywebsite at www.juniorminerjunky.com andsign 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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