Short Squeeze in the Gold Sector
The imminentshort squeeze gold bulls had been waitingfor since late July, was triggered yesterday after U.S. equitieswere down over three percent the previous session. Just after the London MetalsExchange (LME) opened yesterday morning, gold spec shorts slowly began to coveras Dow Futures were showing more weakness before the opening bell. Once theU.S. CPI inflation data came in lower than expected on Wednesday morning, managedmoney speculators began aggressively covering gold.
Thecombination of safe haven buying and lower than expected inflation forced thegold price up nearly 3% to a six-week high, while back-testing its 18-weekmoving average. Gold had yet to test this strong technical resistance levelsince breaking down below it in mid-April. The lower than expected inflation fromthe CPI may influence the Fed to hint of a pause in its rate-hike dot plot atthe next FOMC meeting on November 7-8, which induced some of the speculativeshorts to take their profit.
Furthermore,after the Dow Jones Industrial Average (DJIA) was down 830 points on Wednesday,President Trump began to publiclycriticize the Fed for the third time this year. During a Fox News interview earlier this weekhe said, “I don’t know whattheir problem is that they are raising interest rates, and it’s ridiculous”. Trumpis attemptingto politicize the Fed, while influencing the U.S. dollar lower. Thisjawboning has assisted in weakening the world’s reserve currency and benefitshis economic policies. Since gold’s six-month weakness has been largely attributedto the recent continued strength in the dollar, Trump’s comments also contributedto the short squeeze in the futures market.
Althoughboth the GDX and GDXJ soared over 6% yesterday along with the gold price, mostjunior resource stocks barely moved, as tax-loss selling along with investorindifference towards the tiny sector continues to take its toll. Since the socalled “Junior Miner ETF” completed a highlypublicized GDXJ re-structure last year, most of the Van Eck ETF’sholdings contain major and mid-tier miners, so it is nolonger a junior sector barometer. Over the past year, the TSX VentureExchange has become less skewed toward resource sector stocks in favor ofhighly volatile cryptocurrency and cannabis companies, so the TSX-V is nolonger a miner barometer either.
The GDXgapped up and ran towards strong resistance at $21 yesterday and the majorminer ETF closed solidly above its 50-day moving average for the first timesince early July. Last week, Imentioned the possibility of a Head & Shoulders bottom beingformed in both theGDX and the GDX/GLDratio which has now taken place.
However, thenoticeable under-performance of both silver and the Global Silver Miner’s ETF(SIL) is troubling. Silver lagged the gold move yesterday, while SIL moved up just4% and was unable to close above its 50-day moving average. Historically, bothsilver and SIL lead gold higher with much stronger moves in the early stages ofa trend change in the sector. This was indeed the case in early 2016, when the goldcomplex moved higher from a major bottom.
We will needto see some follow through today in the sector, or the short squeeze will runthe risk of being a one-day affair. This past June, we had a one-day silvershort squeeze and the SIL did not show relative strength either. The preciousmetal moved sharply towards strong resistance at $17.50, then traded sidewaysfor a few sessions before proceeding to move much lower for the next fourmonths.
Technically,once we get a weekly close in December Gold today above $1211, a medium-termbottom has been struck. And a weekly close above $1310 on this move would favora long-term bottom being in place. However, the magic number for gold bulls tofocus on is a monthly close above $1375, which would technically signal a majorbottom in the gold complex being firmly in place.
Forconfirmation of a gold stock long-term bottom being in place, we need to see aweekly close above $21 on the GDX. Until we see this, along with participationby most of the junior resource stocks and both silver and its miners outperforminggold in the short-term, I feel there is no need to chase gold stocks. However,beginning to accumulate your favorite juniors on weakness is now recommended.
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By David ErfleContributing tokitco.com
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