Contributed Commentaries
The Last Deep Value Sector Left in the Market
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
While the precious metal miner sector continues to wander aimlessly into year-end, historically low volume in the GDX has made the miners nearly impossible to trade successfully. The dreariness of the major miner ETF has done a marvelous job of keeping investors out of most everything gold related this year, as the “risk on” trade continues into just about everything else.
However, despite the disgust participants have shown for the miner space, a handful of grassroots, early stage exploration juniors have skyrocketed, making small fortunes for speculators fortunate enough to buy early, then wise enough to take some profit before the inevitable 50% correction has taken place in most of them.
Unfortunately, as I have been warning readers in previous missives, tax-loss sellers have been largely responsible for beating down most of the junior sector, while we head into the final Federal Reserve Open Market Committee (FOMC) meeting speech on Dec. 13. The gold price has been range-bound between $1260-$1300 since late September, with the potential competition from rising interest rates having sector participants nervously awaiting the outcome of the interest rate decision by the FOMC. This month’s meeting should provide some much-needed resolution to this ongoing concern.
Hopefully, many of you are taking advantage of the buying opportunities tax-loss selling has created in most of the high-quality junior exploration firms who are well-managed and cashed up through 2018. While the market continues to bid up US equities, not to mention the crypto-currency market led by Bitcoin now trading near $10,000, most of the quality junior resource stocks remain in the bargain bin. In my experience, the best time to buy a junior resource stock is when you feel terrible doing so. Judging by the lackluster retail turn-out at the just concluded Silver & Gold Summit in San Francisco, terrible is a good word to describe how many sector participants feel about this sector at the moment.
The mining space is the last deep value sector left in the market, while most everything else has taken off during what I believe to be the beginning of the "Everything Bubble". Energy and commodities were also lagging, but have recently started to rise with the now parabolic US market, as the inflation trade is beginning to come into the marketplace. TIPS (Treasury Inflation Protected Securities) are doing much better than traditional Treasury bonds over the past few months. This is a sign that investors are starting to hedge against an uptick in inflation.
During the first week of November, the US Dollar has reversed what appeared to be a very bullish reverse head and shoulders bottoming pattern. Historically, when there is a failed head and shoulders pattern, there will often times be a strong move in the opposite direction. A weaker US Dollar reduces purchasing power, which in turn boosts commodity prices. The level to watch on the USD Cash Settle Index is the 91 region. The market has pretty much priced in a rate hike in December, but if Chairperson Janet Yellen has a dovish tone regarding future rate increases in her speech, or during the following press conference, the US Dollar could break strong support at 91 heading into 2018.
Another near-term bullish scenario for gold could be the extreme bullishness in the US market as we head into the final month of the year. The Dow Jones Industrial Average has gapped up four of the past seven sessions and is clearly in overbought territory on optimism for tax cuts. According to the Investors Intelligence Sentiment Index, the retail traders in New York are at their most bullish in 30 years. This does not guarantee a top, but it implies there is not very much buying power remaining in equities, so we could see a long overdue correction of at least 10% begin soon. If the US market begins to sell off in earnest, it would most likely bring fresh buying into the mining space with “risk off” trades.
The North Korean situation is now being treated by the market like the “Boy Who Cried Wolf”, as the gold price barely flinched when it was reported early Wednesday that a missile test by North Korea had a flight time of over 50 minutes. This missile could have flown as far as the mainland United States if sent on a different trajectory. As reported by Jim Wyckoff of Kitco News, “The world marketplace, including safe-haven gold, did not react significantly to news late Tuesday that North Korea launched another ballistic missile—one the U.S. military said could reach anywhere in the world.”
The selling which came into the GDX with rising volume after the non-reaction in gold to the missile news, may be setting the sector up for a capitulation impulse move lower in this index before we see a final bottom. Historically, capitulation sell-offs have taken place at the end of a long consolidation process in the miner sector, which in turn, has ushered in huge up-legs. The level to watch on the major miner ETF is the $21 area and if breached on a weekly basis close, then the $17-$18 level could be seen quickly. However, I do not see this taking place unless the $1260 level is broken in the gold price, bringing the strong support region of $1200-$1210 into play.
Either way, I strongly believe this long in the tooth consolidation has set this sector up for a big move to the upside in 2018. During each of the last two years of trading in the GDX, we have seen bear-trap moves in the December-January time frame, which have caught many sector participants out of position. Even though this does not guarantee a similar outcome this year, the big question in my mind is: Will we see a bear trap impulse move down to the aforementioned levels in the GDX again, or have we already seen the bottom in July? This sector has a habit of pushing participants right to the limit of ones’ endurance before the move they were looking for takes place, so I suggest being psychologically prepared for the former.
In the meantime, many individual junior developers and grassroots, early stage explorers have been creating very good entry points on their respective 2-year weekly charts based on long-term technical analysis, project fundamentals, and valuation.
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