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The Mining Sector is at a Crucial Inflection Point

Commentaries & Views

The precious metal miners have been consolidating the March 15 Fed-speak short-cover bounce with a downward bias as we head into the last day of the first quarter.

Meanwhile, the gold price is trying to consolidate just below the 200 day moving average while the US Dollar has now climbed above the psychologically important 100 level on the cash settle index.

Since the miners generally lead the metal, the continued recent slow bleed of the miners in the face of stronger gold has most gold sector pundits convinced this is a warning for the GDX to break the higher low of $21 very soon. In this scenario, there would then be a high probability of the GDX eventually testing the December low below $19.

Looking at the 2 year weekly chart of the GDX, it appears to have come to an eight month symmetrical triangle inflection point. The digestion process of the six month 179% gain off the major January 2016 bottom could very well end soon with a sharp move in either direction.

This situation has sector participants on the edge of their seats here. If the sector does indeed break-down, then we could easily be headed for a much longer consolidation as we head into the “summer doldrums” period from June through August.

However, since my area of expertise is the junior miner sector, I have been watching many of the positions I follow, or own, make large gains this week. As a matter of fact, a few of them have even broken out to new 52 week highs with strong volume.

This tells me, the quality junior miners may be tipping the direction of the next move out of the aforementioned 8 month symmetrical triangle. This sector has been known to break the opposite way at important inflection points before reversing sharply in the other direction, whipsawing many traders in the process.

However, I believe the “smart money” does not really care about the short-term direction of the gold sector, as many of these small and micro-cap juniors have cashed up recently via private placements and/or bought deal financings. Many are still trading at discount prices and should be bought if you believe the long term gold bottom is in.

When the smart money does indeed feel a long term gold bottom is in place, the short term gold price really does not matter very much if you are looking to invest in high quality early stage exploration companies. Therefore, the realization of this probability gives them the confidence to buy a cashed up, early stage company with high-grade targets in a desirable address.

The continued rise in the quality juniors from the December 2016 low could very well be further proof of the smart money believing we have seen a major bottom in the gold price. Furthermore, this may be why they continue to bid up the quality Developer/Explorers and early stage micro-caps no matter what the gold price does in the short term.

Earlier this week on March 27th, Goldcorp acquired an optionality play I had mentioned last year in my column. Goldcorp has agreed to acquire, by way of a plan of arrangement, all of the issued and outstanding shares of Exeter Resource Corp. for a premium of 67% based on Goldcorp's and Exeter's closing prices on the Toronto Stock Exchange on March 27, 2017.

This acquisition is very healthy for the market as major miners need to replace rapidly depreciating mine reserves going forward.

I believe we stand a good chance of finding out which way the sector breaks soon as the second quarter begins next week. Be on the look-out in your favorite junior miners as you may be able to snap up a few deals while quarter end book squaring trade ends on Friday, March 31st.

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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