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Rising Crude Oil Keeps Gold Above Critical Support

Commentaries & Views

Despite the relentless rise of the U.S. dollar during the past four weeks, the gold price has managed to hold critical support at the $1300 level due mostly to crude oil continuing to rise. The GDX is also trying to close the week above its 200-day moving average and strong resistance at $23 on the back of a tame U.S. inflation report released on Thursday. The inflation report boosted both gold and U.S. equities by having investors believe the Federal Reserve may not have to be so aggressive on raising U.S. interest rates, what with low inflationary expectations.

The short-term overbought U.S. dollar is seeing its first pullback in four weeks and is assisting gold in moving higher above $1300 support after numerous attempts by the bears to run the stops below this critical level. Since gold failed to breakout yet again last month, there has been a growing list of analysts who have warned this selloff could be the beginning of one last plunge to shake out the weak hands. However, the miners have been holding up in the face of gold possibly losing the 13-handle since late last week.

On Wednesday, Reuters reported, “North American gold-backed exchange traded funds saw inflows in April at the highest since September 2017, as a U.S.-China trade war stand-off, tensions over Syria and worries over possible U.S. sanctions on Russia ushered in safe-haven purchases. North American gold-backed ETFs rose 43.7 tonnes worth $1.9 billion in April, a 3.4 percent increase from the month prior, the World Gold Council said on Wednesday. European gold-backed ETF holdings increased by 27.1 tonnes worth $1.2 billion during the same period, after two consecutive months of outflows.”

The GDX has continued to carve out a bottom since the February 9th low and if we get a strong close today above $23 in the global miner ETF, then long-term resistance at $25 will come into view. Even though the majors have been firming up since the low in the GDX, many of the more speculative micro-cap junior resource stocks have been unable to catch many bids. The resource juniors are no longer the only high-risk, high-reward game in town as the Crypto and Pot sectors have begun to heat up again, drawing more speculative capital away from the resource sector.

However, the miner M&A space began to heat up again this week as well. On Tuesday, Lundin Mining Corporation (TSX:LUN) and Euro Sun Mining Inc. (TSX:ESM) announced that they have submitted a proposal to Nevsun Resources Ltd. (TSX:NSU) to acquire all of Nevsun's outstanding common shares for approximately C$1.5 billion. The offer was unanimously rejected by the Nevsun’s board stating the price offered “isn’t good enough.”

Under the terms of the offer dated April 30, Nevsun shareholders were to receive a total consideration of C$5 per Nevsun share including C$2 in cash funded by Lundin Mining, C$2 in shares of Lundin Mining and C$1 in shares of Euro Sun, Lundin Mining and Euro Sun said in a joint statement.

The Nevsun share price has continued to climb this week on heavy volume, raising bidding war speculation even though the company has stated it’s not formally for sale. If a bidding war were to take place, it could spark more sector M&A and be a welcome catalyst in the mining space. 

I will be speaking in Vancouver next week at the Cambridge House International Mining Investment Conference on May 15-16. Please stop by and say hello if you are planning to attend.

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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