The Junior Miner Bargain Bin May be Closing Soon
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As the summer doldrums in the precious metal mining space are coming to a close, many of the best in class juniors have formed year-long accumulative bases in their respective charts. Since the beginning of this year, I have been recommending sector participants to scale into the junior developer/explorers and early stage exploration firms who have made strategic deals with global miners. Most of these companies are not included in the “mid-tier miner” fund GDXJ and have been rising, while the GDXJ continues to languish.
This “follow the money” approach to investing in the precious metal junior space has paid off handsomely, with my junior miner portfolio being up over 33% year to date. However, I feel the window of opportunity to get into the best companies at these low valuation levels may be ending soon.
As I stated last week, when the US Non-Farms Payroll (NFP) report was released, the computer based algorithm sell-off was a good time to add to your positions. The sector has reversed this week, continuing to trade on historically low volume, on a percentage basis, in both the GDX, and the GDXJ.
Meanwhile, the gold price is attempting to break the $1300 level for the third time since April and could generate a breakout from the 2017 trading range, which has been contained between the $1200 and $1300 price levels. Even though many of the quality juniors have made 4-year highs, the gold price technically remains in a bear market until the $1375 level is breached on a weekly basis.
The 4-year highs of many quality juniors speak volumes for the case of gold rising to the $1500 level soon. Four years ago, in April 2013, the bottom fell out of the gold price at the $1500 level which ushered in a historic sell-off in the miners until the final low on January 19, 2016. With many of the best juniors now rising to their respective prices when spot gold was last at the $1500 level, market participants have been trading up these companies as if the gold price is already there. This makes sense, as the miners usually lead the gold price in both directions.
The US market is showing signs that we may see a 10-15% correction heading into September, which has been a historically bad month for stocks in previous over-bought market years. On August 8, the US Market made an intra-day reversal to the downside, while the GDX made the same reversal to the upside off of $22 support.
The miners have been trading inversely to US equities with investors rotating safe haven capital into global miner producers and royalty companies since this reversal. In the meantime, most of the junior developers and explorers have not caught many bids. This may try the patience of sector investors even further, creating a buying opportunity in the junior space if the US market continues to sell off into September.
As far as the miner sector in general is concerned, based on the GDX, the charts of sector leaders Barrick Gold Corp.(ABX) and Newmont Mining (NEM) have turned bullish, while the gold royalty leader in the space, Franco Nevada, is very close to its all-time high. These three companies represent over 27% of holdings in the global miner ETF.
The levels to watch in the GDX are $22 on the downside, and the $25 level on the upside. If the $22 area is breached and closed below on a weekly basis, more consolidation into Q3 could be needed, building an even stronger base going forward. However, once the $25 level has been broken on a weekly basis, the second leg of the miner bull should be under way.