The Gold Sector Consolidation is Showing Signs of Ending Soon
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The gold miner consolidation, which began in early August of 2016, is giving us strong signals of being close to ending soon. Miner ETF traders have been treated to multiple whipsaw moves since the beginning of June, making it nearly impossible to successfully trade the sector. Some of this frustration can be attributed to US equity fund managers who have been book squaring into quarter end this week before heading to the Hamptons for the Independence Day weekend (US markets will be closed next Tuesday, July 4th).
The weekly Bollinger Band width has not been this “squeezed” since the sector began to crash in September of 2012. “The “squeeze” is the central concept of Bollinger Bands. When the bands come close together, constricting the moving average, it is called a squeeze. It signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities.” – Investopedia.com
When the Bollinger Band squeeze was this tight in 2012, the GDX was at the $53 level as the ETF began what was to become a historic sell-off. By the time selling had finally subsided in early 2016, the major miner ETF was below $12.50. Yes, there were multiple bounces, but technically the GDX remained in a brutal bear market for the next 39 months.
Will the outcome of this extremely low-level Bollinger Band width result in a major move in the opposite direction? Here are a few strong arguments hinting that it will.
This miner consolidation is now into the 11th month and the sentiment is below 29% bulls, an area where major bottoms in this sector begin to form. Despite the bearish sentiment, many of the junior miners I own and/or follow are at, or near their respective 4-year high’s.
Moreover, sector Private Placements continue to be over-subscribed, with many being up-sized soon after they are announced. As an example, BonTerra Resources, a company I have written about earlier this year, recently announced a C$12.9M Bought Deal financing which was up-sized to C$20M one week later at a premium of over 50% above the market price. This company was a micro-cap exploration company with roughly C$2M in the bank less than 6 months ago. Since early February, BonTerra has raised nearly C$40M with three separate financings (One being with global miner Kinross Gold). After the deal was announced, management informed me they had to turn down offers of even more capitol for fear of too much near term dilution.
Furthermore, M&A continues in the sector as we just had another junior developer take-over announcement this week. Endeavour Mining announced it will acquire exploration and development company Avnel Gold, which owns the Kalana gold project in Mali, in an all-share transaction valued at about C$159 million.
Additionally, as I stated in my column last week, the Federal Reserve has embarked on their first rate hike cycle since June of 2004 and rate hikes have historically been bullish for the gold sector. As asset prices continue to rise, Fed chairwoman Janet Yellen has been steadfast in her rhetoric recently on continuing to gradually raise the Fed Funds Rate.
I gave a presentation at the International Metal Writers Conference in Vancouver earlier this year. One of the themes of my presentation was to “follow the money” as a successful investment strategy going forward in this new miner bull market. Time is running out to place your bets accordingly on the best in class juniors as I firmly believe these are signs this sector is about to break-out to the upside.
If I am wrong, we should find out soon enough as the sector could possibly break the other way, which would continue this consolidation into the summer if the GDX has a weekly close below the $20.89 level. A weekly close is essential as we could easily be treated to a false breakdown before moving higher, creating a bear trap. If this weekly level is broken, the technical measured move would be the $17 area which aligns with past major support/resistance levels in the GDX.
Either way, place your bets and buckle up miner investors, the sector is about to make a major move!
Full disclosure: I own shares in the companies mentioned in this article. I purchased them in the open market and added to the positions earlier this month. Please do your own due diligence before purchasing shares in any of the companies listed in this article.