Miners Setting Up for a Possible Waterfall Correction Ending

One of the most valuable lessons I have learned since I began investing in this sector nearly fifteen years ago is when the charts turn bearish it can lead to sharp, nasty declines.

As real interest rates continue to rise, along with the US Dollar and US equities, there is no longer a short-term fundamental case to own gold. Hedge funds and retail investors continue to dump anything precious metals related into year-end as tax loss selling in particular is hitting the miners very hard now.

Investors continue to flee gold as the SPDR Gold Trust GLD has seen a record 28 consecutive session outflow of selling since Donald Trump became the US President Elect on November 8th. That is nearly a $4.7 billion withdrawal from the $30.2 billion fund.

With a close below $1137 on Friday, Gold would achieve a dubious feat. This would mark the longest consecutive weekly sell off (seven weeks) since the bear market began in September of 2011. In addition, gold in foreign currencies has also been declining. The demand for US paper Dollars in Europe has been rising significantly and has also now become the currency of choice on the street in the aftermath of what has taken place in India.

The longer this oversold situation continues without a decent bounce, the more I am beginning to feel there may be a waterfall decline into January, which could possibly target the last remaining upside gap in the GDX at 15.50 before we have a substantial move higher. Upside gaps tend to fill sooner, rather than later in this sector so I believe this gap has a very good chance of filling. We need to be mindful of this possibility, as the 2008 miner bear ended with a waterfall decline.

The GDX has now corrected over 41% from a three year high in August at 31.70 and is the 2nd most precipitous drop since the index’s inception in 2006. The last time this major miner ETF experienced a drop this quickly was the 2008 sell-off, which was a 56% dive in just four months and set up a slingshot move to all time highs into 2011 as waterfall declines historically end in a v-bounce. If we drop as much as the 2008 panic, this would take the GDX down to 14!

However, unlike then, the fundamental situation in the tiny mining sector has quickly reversed to bearish with the election of Donald Trump. The reasons to own gold have suddenly been postponed until the expected rate hikes create the necessary inflation expectations needed in order for investors to buy bullion.

Long term I still believe the gold price will rise with higher interest rates and therefore remain long term bullish the miners. However, as I mentioned in a previous post, the gold price has historically risen in reaction to inflation, as opposed to predicting inflation expectations.

Looking at the five year weekly charts of sector leaders NEM ABX FNV SLW leads me to believe there will be more pain for the sector heading into next year unless we begin a strong reversal next week. This, however, is highly unlikely as volume and liquidity is becoming lighter as traders close out trades and square positions before the holidays. I would need to see a yearly close above 22.50 in the GDX to change my short-term view.

My advice is to have a well-researched watch list of miners with price levels in which you would like to enter heading into 2017. Be patient with a large cash position in your miner portfolio and wait for the $1100 gold level to be breached before beginning to scale in.

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."