Fear and Loathing in the Precious Metal Mining Sector
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The two emotions mentioned in the title of this article have been synonymous with the precious metal miner sector for the past five years. The fear comes rushing into the sector when the miners are subjected to sharp corrections which have happened frequently since the gold price lost very strong support at $1500 in 2013. We have been experiencing the loathing for the past 13 months with the miners continuing to drift sideways on historically low volume (on a percentage weighted basis) in the GDX, the major miner ETF.
Silver analyst and historian David Morgan has coined a term which aptly describes the effect investing in the miner space can have on the psyche of the average investor saying, “The miners can either scare you out, or wear you out”. We have been experiencing a “wear you out” phase as the mining sector has under-performed the gold price for the first eight months of 2017.
With most investors continuing to concentrate on the over-valued US equity markets, gold has been quietly out-performing the S&P 500 this year. Gold is up 11.5%, and the S&P 500 is up 9%, while the GDX is only 7% higher in 2017. The miners have suffered a lackluster year so far, mostly lagging gold’s solid move higher.
However, this has presented, pardon the pun, a golden opportunity for investors to get positioned in the high-quality developers and explorers as we await the beginning of the next leg up in what I believe to be a new precious metal miner bull market.
From early 2013 to the end of 2015, the miners were loathed just as much, if not more, than towards the end of the last century, when in 1997, the Bre-X debacle brought shame and disgust to this tiny sector. After the fear and loathing in the mining space triggered by this scandal was at its depths at the end of the year 2000, a new miner bull was born.
Fast forward to August of 2015, when the capitulation phase of what was to become a four-year miner bear was coming to an end, a six-month accumulative base began to form. It was completed in mid-January of 2016 with a bear-trap move which turned into a six-month, 179% explosion higher in the miners.
The consolidation period of this huge move has been forming on decreasing volume for more than twice as long (13 months) as the initial accumulative base which launched the first leg of this new miner bull. It is my contention the next leg of this bull is already in progress, but lacks the volume necessary to break it out above $25 in the GDX. The needed volume to do so should return with most of the big money traders and fund managers after Labor Day.
As I pen this missive, the GDX is beginning to lead the gold price as gold consolidates just below the $1300 level. The relative strength in the miners could be signaling expected dovish comments from Janet Yellen and/or Mario Draghi on August 25th, when the Jackson Hole central banker convention concludes. If these comments are dovish enough to induce a weekly close above $1300 in the gold price, this may provide us with a weekly close above resistance at $24 in the GDX, making a stronger case for a solid bottom in the miners.
Meanwhile, my subscribers and I have been accumulating positions in 30 of what I believe to be the best in class junior developers and explorers while waiting patiently for the next move higher in the sector to be firmly in place.