New Miner Bull Threatened as Major GDX Support is Breached

It appears the miner divergence from gold this past month was a bull trap, as the sector collapsed after the expected Fed rate hike. However, the US Dollar surged higher as Fed chair Janet Yellen telegraphed three more probable rate hikes in 2017, as opposed to the expected two in her post Fed meeting speech. This was enough to run more sell stops in the gold price and take the miners down with it.

When the Fed promised three rate hikes this time last year, the gold price bottomed the next day as it was also sold hard into the final Fed meeting of 2016. However, the miners did not bottom until a month later after a brutal four year bear in which the GDX lost 85%.

What gives me pause on gold bottoming this time just after the final meeting this week, is the equity market breaking out of a two year consolidation as “risk on” is still in play here. The gold price looks very vulnerable now technically and could easily drop below $1000 oz before making a final low as early as Q1 next year.

As I have been mentioning in previous posts GDX ,the ETF for large cap miners, needs to hold the major weekly support level of 20 in order to sustain a technical bull market in the miners. The bull’s last chance would be a close today above 19.80 in the GDX. Given how severely oversold the sector is and sentiment being worse than this time last year, the miners do have a chance of reversing today and closing above this level. The big money shorts have made a killing and could begin taking profits before many begin heading off to the Hamptons for the holidays. However, this bounce eventually needs to exceed the 22.50 area rather quickly in order to give me confidence of a chance at a firm bottom here.

We could also have more US Election drama on Monday as Senate Democrat Nancy Pelosi’s daughter and Clinton campaign manager John Podesta are backing an effort to get electors to ignore the election and vote for Hillary Clinton. This could also spark a short covering rally in the sector as the “Russia rigged the election” rhetoric has been dialed up heading into the US Electoral College decision on December 19th. I realize I am reaching here, as are the Democrats, but it is worth mentioning as a possible sector catalyst none the less.

If the GDX is not able to close today above the 19.80 level, look for the last gap at the 15.50 area to possibly fill as the next level of support. This weekly breach may also set up the very real possibility of an eventual round trip back to January lows and even a chance for a lower low in the mining sector. Not pretty, but we have to manage our risk here and be open to this possibility. I still believe the bottom was made in January, but we need to psychologically and monetarily prepare for the possibility of a lower low.

The short term and the now medium term technical situation screams caution here into Q1 2017 if we get the weekly close below the 19.80 level on the GDX this week. Long term I am still very bullish of the sector, however, I would like to see a weekly close above the 26 level in the GDX to confirm a resumption of this new miner bull.

By David Erfle Contributor to Kitco News
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David Erfle is a 52 year old self-taught mining sector investor. He stumbled upon the mining sector in 2003 as he was looking to invest into a growing sector of the market. After researching the gains made from the 2001 bottom in the tiny gold and silver sector he became fascinated with this niche market. So much so that in 2005 he decided to sell his home and invest the entire proceeds from the sale into junior mining companies. When his account had tripled by September, 2007, he decided to quit his job as the Telecommunications Equipment Buyer at UCLA and make investing in this sector his full time job. He personally survived two bear markets, witnessed incredible sector changes and had to alter his investment philosophy numerous times in order to adapt to changing market conditions."