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Gold Breaks Down as Miners Increase Relative Strength

Commentaries & Views

Since gold bottomed at the $1050 region in late 2015 many analysts, myself included, have been anticipating a breakout above strong resistance at the $1375 level. However, this past April the yellow metal failed for the third time at this area and has now broken down with a monthly basis close below critical support at $1260 on June 29th. Furthermore, bullion had its worst quarterly performance since Q4 2016 and is entering a new quarter after having thoroughly established downside price momentum for the first time in eight months.

Gold is currently bouncing off its 50-month moving average and uptrend line support from the 2015 bottom around the $1240 region, so many are expecting a strong move higher this month. Nevertheless, there is a confluence of resistance at the $1300 - $1310 area which needs to be broken on this bounce, or we may see gold eventually sell down to the next level of support just above $1200. Trading decisions are often made based on trendline support levels and gold has a habit of historically whipsawing investors out of position.

The recent strength in the U.S. dollar has made gold an unattractive option in the global flight to safety. Since the trade tariff dispute involving the U.S., China, and now the EU, began last month, investors have been increasingly turning to the dollar as a safe harbor while selling both gold and equities. However, the worlds reserve currency has stalled at 95 for six weeks running, which is strong resistance at the 200-week moving average on the Cash Settle Index. The dollar rolling over from this level could weaken gold’s currency component enough to allow the metal to commence a rally.

Meanwhile, mining stocks are showing increased relative strength vs. gold and the GDX has remained firmly above critical support at $21. The continued bifurcation of gold royalty companies has played a major role in the outperformance of the global miner ETF and global royalty firm Royal Gold (RGLD) is trading at an all-time high this week. I have also seen many of the quality juniors, which I own and/or follow, attempting to bottom the past few weeks while a few are trading at, or near, their respective multi-year highs. Earlier this year, when gold was threatening to breakout, the GDX was lagging and with gold now breaking down, the ETF has been increasing its relative strength in relation to the metal. So, I would not be surprised to see the GDX breakout above long-term resistance at $25 once the gold price regains a solid $1300 floor.

Moreover, early stage success continues to be rewarded and juniors who control large, high-margin deposits continue to trade higher, or are being taken over. The recent surge in mergers and acquisitions is reason to remain patient if one is holding positions in gold stocks which are trending higher, despite the recent weakness in the metal. However, higher cost miners, along with juniors who are working on lower grade bulk tonnage systems, should be avoided until the gold price rises back above $1300 and makes a solid floor above this level.

July has historically been a good month to buy quality juniors, as most trade on thin volume while many sector participants are on vacation. Recently, there have been many quality junior resource stocks being sold by impatient investors, creating opportunities for speculators with cash and patience. It takes a lot of time and effort to find these opportunities and it is best to be on the hunt for them when the gold space is out of favor. When this sector turns, the stock prices in the quality issues can move up quickly, so if you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/

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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