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Precious Metal Stocks Continue to Lag Gold

Commentaries & Views

Since the beginning of last year, precious metal stocks have been badly lagging the gold price. At the beginning of 2017, gold was trading well below $1175, while the GDX was at roughly the same level it is trading today with bullion firmly above $1300. During healthy precious metal bull markets, the miners typically outperform the gold price by 2x to 3x.

However, until gold closes above $1375 on a monthly basis, it is still technically in a bear market. This has kept many of the large funds out of this sector, denying the fuel necessary to propel mining stocks higher. Since an initial 6-month short-cover induced move began in early 2016, the GDX has been mired in a long-term consolidation pattern. During this consolidation process, quality juniors continue to be rewarded for outstanding drill results and numerous companies which control high-margin deposits have been bifurcating from the sector. Many of these juniors also continue to draw attention from global miners with strategic financings, as the mining sector has become a stock-pickers market since the aforementioned short-covering move peaked in 2016.

Based on the price action in the GDX since the large volume, intra-day, downside reversal on January 25th, long suffering sector investors are growing weary of the gold stock under-performance. The major miner ETF is down 13% and has been lower on 9 of the last 11 trading sessions with large volume, despite the gold price being down just 3% during the same time-frame.

The global market sell-off, which began last Friday, has not helped the miners case either. Serious near-term technical damage has been inflicted on the U.S. stock indexes this week, which suggests they have finally topped out for at least the near-term. I had been looking for probable near-term US market weakness to benefit the miners at some point, but when weakness in equities takes place in panic fashion, gold stocks are initially sold as well. When the herd panics, gold stocks and equities are sold to meet margin calls and build up cash regardless of what the gold price is selling for.

The GDX sustained significant technical damage last Friday when the $23 level was broken. While combining this damage with the global market still on panic watch, I am now leaning towards the critical support at the $21 level being broken in the major miner ETF after a short-term bounce. The sector is trading at levels on the daily chart which suggest an over-sold bounce beginning within the next few sessions that could possibly back-test the $23 region.

The GDX breaking the $23 level, after what now appears to be a bull trap from the mid-December low, has set up a possible final capitulation ending to the aforementioned consolidation process we have been experiencing in gold stocks since August of 2016. As I have mentioned in previous missives, I strongly believe this level needed to hold and was crucial for the GDX to maintain critical support at the $21 region going forward. If we indeed break support at the $21 level, then I would be looking for an exhaustion decline lower which could possibly see an $18 handle on the GDX before making a final low.

I have been cutting back on a few positions while maintaining a core holding in anticipation of a possible impulse move lower into the next Federal Reserve Open Market Committee meeting (FOMC) speech on March 21st. This will be newly appointed Fed Chairman Jerome Powell’s first FOMC meeting and I would be very surprised if the outcome did not seriously affect the gold sector.

The U.S. dollar is in the process of back-testing the 91 level on the Cash Settle Index, which was critical support and is now resistance. We may see more safe-haven capital come into both gold and the dollar if continued higher volatility in equities in the coming days induces more panic selling in the short-term, while gold stocks could continue to be sold. Gold equities have historically bottomed before the market during panic selling cycles, as money flowing out of stocks looks for a home in safe-haven vehicles. If past becomes prologue, look for strength in the GDX with large volume as a possible barometer for the end of equity panic selling soon afterwards.

The bad news is, caution is advised into quarter end and more patience is required for long-suffering miner bulls before we see the final bottom of this long-term consolidation process. The good news is, this possible exhaustion decline lower in gold stocks would shake out the last of the weak players and create a final low before beginning the second leg of this new gold stock bull market.

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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