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More Headwinds for the Precious Metal Miner Sector

Commentaries & Views

In last week’s missive, I warned of more probable weakness in the precious metal miner space as we head into the the next Federal Reserve Open Market Committee (FOMC) meeting on November 1st. Earlier this week, after the monthly meeting of the European Central Bank (ECB) was concluded, the ECB left interest rates unchanged, but scaled back its big bond-buying program, both of which were expected. However, ECB President Mario Draghi at his post-meeting press conference expressed a more dovish stance, which was enough to break the US Dollar out of the bullish reverse head and shoulders bottom pattern above the 94 level on the Cash Settle Index. The measured target from this pattern on the US Dollar chart is the 97 area, which may force the gold price down to strong support in the $1200-$1215 region before year-end if this target on the Cash Settle Index is reached.

If the bullish US Dollar action were not enough of a headwind for the miners this week, Barrick Gold issued a very disappointing Q3 after the market close on Oct. 25, the day before the ECB meeting. The firm’s bad quarter, together with the sell-off in gold after Draghi’s dovish comments, caused a severe sell-off in the GDX. Being nearly 10% of the major miner ETF, Barrick Gold is the world’s largest gold miner and a sector leader.

With the market now pricing in an over 90 percent chance of the Federal Reserve raising interest rates in December for the third time this year, market participants are also looking to see who will replace Janet Yellen as Fed Chairperson when her term expires in February. The field has been narrowed down to five candidates, with Jerome Powell, who has served as a Fed Governor since 2012, being the odds-on favorite to depose Yellen. Powell’s main qualification seems to be that he’s just like Yellen except he’s a Republican, which could mean that policy will continue unchanged and there will be more rate hikes ahead if he is chosen.  So there will probably be no relief for gold during the Fed Head sweepstakes.

President Trump is expected to make his decision 'very shortly' according to people familiar with the matter, and whatever the outcome, it will most assuredly influence the gold sector. Expectations are that the announcement will occur by November 3rd at the latest, when the President embarks on his tour of Asia.

As I type this missive, the GDX is nearing support at the $22 level, while being down 8 of the last 9 sessions and becoming short-term over-sold on the daily index. I am looking for a bounce from this area, while continuing to be patient with a large cash position. However, if the $22 level in the GDX is breached on a weekly basis, the $17 area may possibly come into play after a short-term bounce. Continuing to err on the side of caution in the precious metal mining space is strongly advised as we head into the probable rate hike announcement after the last FOMC meeting of the year is concluded on December 13th.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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