Miners Consolidating Into Quarter EndFriday October 07, 2016 12:37
The miners are about to enter month four of a correction (or larger consolidation) that has seen the GDX correct 20% and the HUI 23% from their early summer highs. The 175% advance in gold stocks, which happened in 5 months and 22 days, was the 11th greatest first leg up in any tangible asset bull market during the past 150 years. This correction is healthy and necessary here and may be coming to a major inflection point at the GDX 25-26 level.
As hedge funds begin to flee Deutsche Bank en mass into quarter end, the stock market may have started to roll over into “crash season”. The 25-26 level on the GDX was major resistance back in 2013-14 before the capitulation phase into December 2015 and is now strong support for the move up from the January low.
The possibility of the miners getting sold with the market here is in the minds of every miner holder with large gains as that level has been tested three times here in September. Many market participants still remember the market reaction to the Lehman Bros/Bear Stearns collapse as there were no buyers for six months while the world suffered through a global “margin call” in which everything with a bid was sold. Unlike then, miners are emerging from the worst bear market in 90+ years rather than completing a major distribution top following a nearly 7-year bull run.
On the other hand, many investors who have missed the entire move are waiting on the sidelines for a lower risk entry point farther down. If indeed the GDX 25-26 level is broken, I will be looking for the 22-23 level to be visited within the next few weeks. However, if this scenario does unfold, I believe we could very well see a “sling-shot” move off the 22-23 level as the investors waiting on the sidelines snap up cheap quality miners. If you are holding miners here then you should mentally prepare yourself for the 22-23 level in the GDX while holding cash for possible buying opportunities in the miners you may have missed earlier this year.
The bottom line here is we remain in a young miner bull market and the key is to stay invested until the sector has matured which, historically, should not begin to happen for at least another three to four years.
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."