Quality Junior Miner Trains are Leaving the Station
With goldbeing up over 13% while the GDX was up just a paltry 7% in 2017, I stronglybelieve a major mean-reversion catch-up rally is in the process of unfolding inthe miners. Historically, the GDX would have leveraged the 13% gain in goldlast year by 2x to 3x for solid annual gains of at least 25% to 35%. But sinceinvestors were more focused on what seemed to be forever rising equity marketsand cryptocurrencies, they wanted nothing to do with the miners of gold.
Thecombination of the miners underperforming the gold price and a soaring USequity market in 2017 gave miner investors little reason to hold gold stockpositions into year-end. However, this set-up became the perfect storm for contrarianmoney waiting topounce on tax-loss selling deals in quality juniors as we headed into theexpected Fed rate hike on Dec 13.
Since theannouncement of the rate increase, the miners had been leading gold higher untilthe second trading day of this year. The solid move in gold stocks began afterthe $21 level in the GDX was tested and held in mid-December for the fourthtime in 2017, but has stalled out at the $24 area on the first day of trading ofthis year when it became short-term overbought on Jan 2.
Despite thesell-off in the major miner ETF, the quality silver juniors and low-costproducers have continued to climb while the GDX has been correcting. Whensilver and its miners lead gold after a prolonged consolidation in the preciousmetals sector, it has historically been a very good indication of a majorbottom being reached. Most of the quality junior silver miners were up over 10%on Fed day last December and have added more to their respective gains sincethen.
Furthermore,while the big money traders and fund managers are returning from the holidays,quality juniors are beginning to bifurcate from the sector after the GDXJ hitstrong resistance at the $38 level. In fact, many of the juniors which I holdand/or follow are already up over 30% since mid-December of last year and a feware poised to possibly break-out to their respective 52-week highs ahead of thesector.
After abrutal decline and the last tax-loss selling, investor has left quality juniors,which maintain a low share structure. The move off a major low can be breathtaking. This is why the resource speculator should always have an ample cashposition heading into Q4, which can often be the best time to buy a juniorresource stock.
Gold rose anunprecedented 15 of next 16 sessions after the Fed raised rates in mid-Decemberand has been trading sideways in 2018 between $1307 and $1325 while working offan overbought situation on the daily chart. It would bode well for bullion tocontinue towards very strong long-term resistance above $1350 in January if itcan continue to build a base above $1300 next week.
After back-testingthe neckline of the 3-month head and shoulders top on the daily Cash SettleIndex at the beginning of this week, the US dollar reversed on Wednesday after reportsthat China would slow or halt its purchases of U.S. Treasuries. The buckslipped further when the euro popped higher on Thursday following hawkish minutesfrom the European Central Bank's December meeting. An upside breakout in theeuro, which is near a 3-year high, could weaken the dollar towards long-termsupport at 91. A close below this critical level of support this month wouldopen up the possibility of a monthly close above $1375 in gold. This would givethe market technical confirmation of gold being in a bull market and bringmassive amounts of capitol into the tiny mining sector.
Anothershort-term catalyst for gold would be the beginning of a long overdue 10%+correction in the US stock market. The severely over-bought S&P 500 indexhas now gone nearly two years without a 10%+ correction and is trading at anextreme above its 200-day moving average, not to mention an averagetrailing-twelve-month price-to-earnings ratio of 31x, which is far above the28x bubble threshold. The bullish sentiment in US equities is now over 60%bulls, which is a critical psychological barrier that has not been seen since2011. Investors will remember gold when their stock-heavy portfolios begin tosell-off in earnest and rush to diversify into the miners.
The painfulgold stock consolidation is now entering its 18th month and has built a solid accumulativebase in the GDX, which can support another huge up-leg in the miners. It is mycontention that the major selling has now dried up in gold stocks, so weaknessshould be bought in the quality miners before the GDX reaches strong resistanceat the $25-$26 level. The bullish percentage index (BPGDM) is still below 30%bulls and although the most recent Commitment of Traders (CoT) report hasbecome less bullish, it is still well below levels of previous tops.
If thescenarios I have mentioned in the US dollar and/or the equities begin to unfold,the next leg of the precious metal miner bull will be technically underway oncethe $26 level in the major miner ETF has been broken.
If yourequire assistance in choosing the best quality junior resource stocks toinvest, please stop by my website and check out the subscription serviceat http://juniorminerjunky.com/.
By David ErfleContributing tokitco.com
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