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Cash and Patience Advised for Gold Sector Investors

Commentaries & Views

For the past few weeks, I have been erring on the side of caution in the Gold space. To the mainstream investor who is primarily involved in a parabolically rising stock market, gold appears of little interest at the present moment. With US equities making all-time highs, the miners have continued to trade on lackluster volume in the GDX, while some are now being sold for tax-loss. However, with equities stealing gold’s thunder, it’s amazing that the gold price has shown as much resilience as it has in the last few weeks.

Even though gold has remained in a range bound consolidation, the miners have not been so lucky, with the GDX underperforming the metals since the beginning of September. Historically, this does not bode well for the Gold space, as the miners usually lead the metal in both directions. We have had a few possible gold sector catalysts this week come and go without much action in the miners while we head into the US Non-Farms Payroll (NFP) report for October, which will be released by the time this article is posted.

With the market having priced in a 98.2% probability that the Fed will raise rates to 1.25 - 1.50 in December, a strong report of over the expected 315,000 jobs created in October could trigger computer algorithm based trades to sell down the miners toward strong support at $22 on the GDX. However, a considerably weak report should give the sector a short-cover bounce.

Either way, the sector is due for a bounce within the next week or so as the miners are becoming over-sold on a short-term basis. When the inevitable bounce does take place, the big question miner investors will be asking themselves is “long-term bottom, or bull-trap?”. I am leaning towards the latter, before the miners can begin the second leg of this new bull market. The gold sector has a history of false-moves before a major up-leg takes place, taking most participants out of position before moving higher. If the near-term bounce is indeed the bottom, what we need to watch for is rising volume on the GDX. If we get strong volume of at least 75-100 million shares traded on the reversal day in the major miner ETF, with strong follow through the next day, the odds are very good for a long-term bottom being in place.

Another good sign for a long-term bottom would be the price action in the world’s largest gold miner and sector leader Barrick Gold (ABX). After a very disappointing Q3 last week, the stock has continued to sell off and is nearing strong support at the $13.75 level. Since Barrick makes up nearly 10 percent of the GDX, I would like to see a strong volume bounce from this area before being comfortable in committing more capital to the miner sector.

If we do not see strong volume accompanying a bounce at these levels in the GDX and ABX, I would not advise chasing miners. Therefore, cash and patience would be advisable, as we head into the last US Federal Reserve Open Market Committee meeting speech on December 13th, which also coincide with the tail end of tax-loss selling.

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.