Bewitched, Bothered, and Bewildered
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Early this week, the miners experienced a waterfall decline towards strong GDX support at $22.50, while the gold price held near strong resistance at $1250. This is highly unusual and has many scratching their heads, searching for a reason. While the gold price continued to hold up extremely well in the face of a strong US Dollar, the miner action in this tiny, volatile sector has left investors bewitched, bothered, and bewildered.
The miners usually lead gold but this major divergence from the gold price for this length of time was very unusual. The GDX went from over-bought at RSI (Relative Strength Index) 70, to being over-sold near RSI 30 on the daily chart in three weeks while the gold price was down barley 2% in the same time-frame.
This extreme miner diversion from the gold price for this length of time has not happened since the global margin call panic during the 2008-2009 market melt down. Many, myself included, assumed the harsh miner sell-off was forecasting an immediate gold price drop back down to the $1210-$1220 region.
On March 2, gold finally began to sell down towards these levels in earnest. I believe a news release on March 1st, regarding the upcoming April 23rd French election, may have been the reason for the extended delay in the gold sell-off the miners were predicting.
Conservative candidate Francois Fillon promised to “fight to the end” of a deepening government probe into corruption allegations as French prosecutors investigate possibly fictitious parliamentary aide jobs once held by his wife and two children. Fillon had been the leading candidate and was considered the most likely to beat Le Pen and win, but he has seen his support plummet since the probe began in late January.
The corruption scandal of this career politician has opened the door even further for the possible election of Marine Le Pen. The populist candidate has presented herself as the French version of Donald Trump, running as the anti-elitist and anti-establishment choice for the president of France. Le Pen argues that the promises of the EU have failed while the French want to be “free” again.
The Le Pen program has listed 144 electoral promises and has adopted Donald Trump’s position saying “France First”, vowing to end “mass immigration”. Her political platform has also taken protectionist measures for the French economy, and within six months has promised to move for a referendum on the withdrawal of France from the EU (“Frexit”).
The EU Dream of creating a federalized Europe while transforming it into a single European state is collapsing. I believe this will continue to be very gold bullish going forward and will also help to maintain a strong monthly floor of $1200, even as the US dollar continues to rise.
Despite the recent miner sector sell-off, gold closed at $1250 on a monthly basis this week while it continues to be bullish on the monthly chart. Many of the quality juniors in which I either own, or track, have continued to bifurcate from the rest of the sector, while their share prices remain in weekly bullish up-trends. The numerous bullish long term gold fundamentals in which I listed last week have not gone away, in fact, the EU situation continues to get worse.
In previous updates, I have mentioned the $22.50 level as being an area which needs to hold on a weekly basis in order for me to remain bullish on the miner sector in the short to medium term. The GDX has now corrected 15% in three weeks after a scathing eight week 37% rise, which is normal and healthy, as I believe we need a strong base before continuing higher. However, the quickness and severity of the miner sell-off while the gold price is still in a weekly bullish uptrend is not normal and is cause for concern.
If we get a weekly close today above $22.50 on the GDX then I believe there is a chance this correction has run its course. If not, I think we should expect further selling down to the very strong long term support at the $20 level as we head into the Non-Farm Payrolls (NFP) release on March 10th.
When major bull markets are in their infancy, the bull will pull every trick he has out of his bag in order to buck as many early riders off his back as possible. This waterfall decline in the miners just may be another trick in order to separate you from your miner positions. In the meantime, repeated viewing of this clip from one of my favorite films may be in order for all of the long term gold sector bulls out there.