Precious Metal Stocks Continue to Lag Gold
Since thebeginning of last year, precious metal stocks have been badly lagging the gold price. At the beginning of 2017, gold was trading well below $1175, while theGDX was at roughly the same level it is trading today with bullion firmly above$1300. During healthy precious metal bull markets, the miners typicallyoutperform the gold price by 2x to 3x.
However, untilgold closes above $1375 on a monthly basis, it is still technically in a bearmarket. This has kept many of the large funds out of this sector, denying thefuel necessary to propel mining stocks higher. Since an initial 6-monthshort-cover induced move began in early 2016, the GDX has been mired in along-term consolidation pattern. During this consolidation process, qualityjuniors continue to be rewarded for outstanding drill results and numerouscompanies which control high-margin deposits have been bifurcating from thesector. Many of these juniors also continue to draw attention fromglobal miners with strategic financings, as the mining sector has become a stock-pickers marketsince the aforementioned short-covering move peaked in 2016.
Based on theprice action in the GDX since the large volume, intra-day, downside reversal onJanuary 25th, long suffering sector investors are growing weary ofthe gold stock under-performance. The major miner ETF is down 13% and has been loweron 9 of the last 11 trading sessions with large volume, despite the gold pricebeing down just 3% during the same time-frame.
The globalmarket sell-off, which began last Friday, has not helped the miners caseeither. Serious near-term technical damage has been inflicted on the U.S. stockindexes this week, which suggests they have finally topped out for at least thenear-term. I had been looking for probable near-term US market weakness tobenefit the miners at some point, but when weakness in equities takes place inpanic fashion, gold stocks are initially sold as well. When the herd panics, goldstocks and equities are sold to meet margin calls and build up cash regardlessof what the gold price is selling for.
The GDXsustained significant technical damage last Friday when the $23 level wasbroken. While combining this damage with the global market still on panicwatch, I am now leaning towards the critical support at the $21 level beingbroken in the major miner ETF after a short-term bounce. The sector is tradingat levels on the daily chart which suggest an over-sold bounce beginning withinthe next few sessions that could possibly back-test the $23 region.
The GDX breakingthe $23 level, after what now appears to be a bull trap from the mid-Decemberlow, has set up a possible final capitulation ending to the aforementionedconsolidation process we have been experiencing in gold stocks since August of2016. As I have mentioned in previous missives, I strongly believe this levelneeded to hold and was crucial for the GDX to maintain critical support at the$21 region going forward. If we indeed break support at the $21 level, then Iwould be looking for an exhaustion decline lower which could possibly see an $18handle on the GDX before making a final low.
I have beencutting back on a few positions while maintaining a core holding inanticipation of a possible impulse move lower into the next Federal ReserveOpen Market Committee meeting (FOMC) speech on March 21st. This willbe newly appointed Fed Chairman Jerome Powell's first FOMC meeting and I wouldbe very surprised if the outcome did not seriously affect the gold sector.
The U.S. dollar is in the process of back-testing the 91 level on the Cash Settle Index,which was critical support and is now resistance. We may see more safe-havencapital come into both gold and the dollar if continued higher volatility inequities in the coming days induces more panic selling in the short-term, whilegold stocks could continue to be sold. Gold equities have historically bottomedbefore the market during panic selling cycles, as money flowing out of stocks looksfor a home in safe-haven vehicles. If past becomes prologue, look for strengthin the GDX with large volume as a possible barometer for the end of equitypanic selling soon afterwards.
The bad newsis, caution is advised into quarter end and more patience is required forlong-suffering miner bulls before we see the final bottom of this long-termconsolidation process. The good news is, this possible exhaustion decline lowerin gold stocks would shake out the last of the weak players and create a finallow before beginning the second leg of this new gold stock bull market.
By David ErfleContributing tokitco.com
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