Fed Meeting Minutes Provides a Buying OpportunityThursday May 26, 2016 12:02
Long suffering gold sector bulls have just been given a gift by the Federal Reserve as the minutes released from the April meeting have provided a hawkish tone to the ongoing interest rate saga.
The extremely overbought miners were pushed lower on profit taking that has given long term bulls waiting on the sidelines a chance to buy their favorite miners at lower prices. However, I believe most will miss the boat again as many sector gurus have been projecting a 50% or worse correction that may never come to pass.
This move from the bear trap low on Jan. 19 has been very difficult for gold sector bulls that have missed the bottom. When the bear really started to get ugly last year they were constantly punished for chasing strength. Now that the time has come to chase strength on short pullbacks, they are reluctant to do so as new money unscathed by the bear keeps buying what it perceives as long-term value.
As long as gold remains above $1250 on the weekly chart, I believe the miners will continue to mean revert as the quality producers make very good profits above this Gold price. The current correction may only amount to 15% or less as a larger correction is more likely in the heavy resistance area of GDX 28-30 and HUI 250-260 levels which I have been targeting.
The quality development plays with large deposits should also continue to rise as the majors have started to pull the trigger, snapping up companies. The latest example is Goldcorp acquiring Kaminak Gold last week for $520 million.
The longer gold stays above $1250, the more likely M&A will start to heat up as the majors have to rebuild their production pipelines and replace reserves. Thus, they have to start buying quality junior miners with large quality deposits that are economic above $1200 gold.
There is also another possible scenario to keep in mind here as the commercial short position continues to rise amid very strong inflows into GLD. Since early March a few gold sector gurus have been warning of the rising commercial short position and the fact that these all-knowing “smart money banksters are never wrong”, so we should take our profits and wait for them to give us a chance to “get back in”. I’m sorry, but NOBODY is “never wrong” and as the open interest keeps rising there could very well be a commercial short squeeze waiting for a spark to get it started. By the way, the Brexit vote in on June 23rd.
David Erfle is a 52 year old self-taught mining sector investor. He stumbled upon the mining sector in 2003 as he was looking to invest into a growing sector of the market. After researching the gains made from the 2001 bottom in the tiny gold and silver sector he became fascinated with this niche market. So much so that in 2005 he decided to sell his home and invest the entire proceeds from the sale into junior mining companies. When his account had tripled by September, 2007, he decided to quit his job as the Telecommunications Equipment Buyer at UCLA and make investing in this sector his full time job. He personally survived two bear markets, witnessed incredible sector changes and had to alter his investment philosophy numerous times in order to adapt to changing market conditions."