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Miners Continue to Sell-Off into the Final French Election

Commentaries & Views

The gold sell-off below its 200-day moving average, which the miners were predicting by beginning a harsh decline three weeks ago, has happened quickly. While the selling in the miner sector was nearing over-sold territory, the Federal Reserve 2-day meeting speech this past Wednesday, May 3rd, revealed no change in the Fed’s plans for two more rate hikes this year.

After the speech was released, the market continued the process of further pricing in two more interest rate hikes going forward into year-end. This gave bears the impetus to push gold toward the next support level around $1220, while silver continued to sell down what has now become 14 consecutive days of selling in the white metal. In the short end of the curve, the market has increased the likelihood of a June hike with a 94% probability now being priced-in.

By the time this column is posted, we will also have the details of the Non-Farm Payrolls (NFP) report for April. The market is expecting employment to increase by 185k in April, so a considerable jobs growth figure above this number would virtually guarantee a June rate hike.

Since the announcement of the GDXJ re-balance, there have been quite a few quality GDXJ miners which have been ideal candidates for savvy traders to short before the issues are to be sold from the “Junior Miner ETF”. This has been instrumental in the acceleration of selling in the miner sector before the gold price began to weaken.

The extreme miner weakness in relation to the gold price has done an excellent job of getting many sector investors “out of position” during what I believe to be a consolidation period of a new long term miner bull market. This has presented a very good buying opportunity for patient miner investors who may have missed these stocks last year during the huge first move up from the historic sector lows.

The initial surge off the GDX major bottom in January 2016 was a “dart throwers” move, as massive institutional short-covering was instrumental in the global miners lifting all the boats in the miner sea.

After the initial 179% move in the GDX from the January 2016 bottom in just six months, the major miner ETF had a 40% correction from early August to mid-December 2016. Near the end of the five-month correction, late comers to the rally were forced to sell for tax-loss to offset capital gains liability which is commonplace in this highly volatile sector. Since August of last year, the mining sector has been mired in a nine-month consolidation period when measured by this global miner ETF.

However, it has been my contention since the December 2016 bottom, investors should be concentrating on the quality companies outside of both the GDX and the junior miner fund GDXJ, as the sector has become a “stock pickers” market.

As mentioned in my previous missives, the quality junior miners outside of the GDXJ have been bifurcating from the sector since the December 2016 higher low. Most of these bifurcating moves have been correcting this week as quality is usually the last to sell-off during miner corrections in bull markets.

Moreover, I believe the up-coming final French election on May 7th could possibly be a major catalyst for the gold sector. The new President of France will be known to the US market by the time the opening bell rings on Monday, May 8th.

This election has a few similarities to the recent US Election, with a populist candidate (Marine Le Pen), running against the establishment candidate (Emmanuel Macron), who is favored by the very biased French media backing his campaign.  

Macron is a former investment banker and is new to politics. He is running for a party that did not even exist 18 months ago, yet he is favored in the polls. Le Pen is the anti-establishment, blue-collar candidate, whose protectionist policies are more in line with “France before the EU”. She has also vowed to hold a referendum to leave the EU, along with the Euro, six months after becoming President.  
Macron recently appeared hopelessly out of touch with the working class when he was meeting Union leaders at a striking Whirlpool factory in his hometown. The favored candidate was booed on arrival, whereas Le Pen was being cheered outside on the picket line with the workers.

Just as the majority assumed the “Brexit” vote would fail, most are assuming Macron has already won. Because of this perception by the market, I believe a Marine Le Pen upset would immediately begin to price in “Frexit”, which would be a huge gold sector catalyst. When you combine the severely over-sold miners, with a very gold bullish outcome, there could easily be a huge short-cover move, combined with renewed safe-haven buying.

However, if the establishment candidate Macron were to be declared a very DECISIVE victor, we could easily see more selling down to the $20 level on the GDX while gold could possibly break the $1200 level.

The miners have already priced in a sub-$1200 gold price, so I see the $20 level holding on a weekly basis closing in the GDX for a higher low very soon. My philosophy remains to be fully invested in the junior miner sector if the $20 level in the GDX continues to hold on a weekly basis going forward.

There are now capitulation selling “fishing lines” in many shares which is commonplace in the miners near major bottoms, so the French Election results could very well provide the catalyst for an imminent short-cover bounce.

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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