New Fed Chair Prematurely Ushers in the PDAC Curse
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Next week, the annual Prospectors and Developers Association of Canada (PDAC) convention in Toronto will be attended by over 25,000 people from 130 countries, who will be visiting with nearly 1,000 exhibiting organizations. PDAC is the world’s biggest mining industry conference and is also a massive, non-stop, four-day party. Between the hospitality suites at the Royal York, InterContinental and surrounding establishments, there will be numerous client receptions after conference days are concluded.
The companies in attendance usually make sure to send out press releases during the week leading into PDAC, so they have a recent topic of discussion while trying to lure investors into making an investment in their stock. This flurry of news releases into and around the convention leads to an inevitable news drought following it. When combined with seasonal weakness that is common in the gold sector in Q2, we get what has been regularly referred to as the “PDAC Curse”.
This year, with the mining sector mired in what has become a 19-month consolidation, the curse may have come early. Earlier this week, newly appointed Federal Reserve Chair Jerome Powell testified before the U.S. House of Representatives' Financial Services Committee and acknowledged the economy had strengthened recently. Gold was relatively unfazed, until the question and answer period which took a hawkish tone and prompted investors to increase bets on a fourth Fed rate increase in 2018. The reaction torpedoed the mining sector as investors began to focus on a revised Fed Dot Plot and the U.S. dollar zoomed to a 3-week high.
The so-called “Dot Plot” charts the rates by the Federal Reserve Open Market Committee (FOMC) participants in order to determine where the central bank believes rates are going, including its longer-term neutral rate. The Fed is expected to approve its first rate increase of 2018 at its next policy meeting on March 21st and it may also provide an updated Dot Plot. After the concluded meeting speech, Powell will hold his first news conference as the new Fed chair.
The chart for this year is currently showing three interest rate hikes, and the fed funds futures market is also reflecting the potential for three rate hikes. However, equity investors have become anxious about the idea that there could be another rate increase and considering Powell’s hawkish comments on February 27th, the odds of a fourth hike have risen considerably.
JP Morgan's chief U.S. economist Michael Feroli had been expecting four rate hikes this year, and Powell's comments served to reinforce his view. "Today's (Tuesday’s) comments appear to open the door for others on the Committee to revise their forecast as they see fit, and that Powell himself may be inclined to look for four hikes this year," he wrote in a note. "...We now think the odds are tilted slightly in favor of the median participant revising up their outlook to look for four hikes this year and another three hikes next year."
In the light of this recent reaction in the gold sector, the possibility of the $1300 level being breached has returned, while we head into the March 21st, FOMC meeting. The continued lag of the miners in relation to the gold price is another reason to expect further weakness into the Fed policy meeting and to possibly see the next level of support at the $1270 - $1280 region before the end of Q1.
As mentioned in this column last week, there is a possibility of critical support at the $21 level on the GDX being broken and the action this week raises the odds of this taking place. The continued sell-off after the Powell testimony had the major miner ETF test this region yesterday for the sixth time in the past year. If the $1300 level in gold is indeed breached into quarter-end, then I would expect this support to be broken and the $18 level may come into play quickly on a stop-run.
However, there are a few bright spots in all this precious metal gloom and doom. The U.S. stock market began a sharp reversal after Powell’s remarks and continued much lower with rising volatility on Trump tariff talk into yesterday’s close. Meanwhile, during the last few hours of trade, the gold sector began to de-couple from U.S. equities and the GDX ended the session with an upside reversal from $21 while the DJIA was down over 1.5%.
Furthermore, the silver futures Commitment of Traders (CoT) report issued last Friday showed the net spec position being below 10%, which is comparable to previous silver bottoms in July and December of 2017. The silver price began a two-month uptrend after these previous two net spec positions were reported as being below 10% and a strong silver bounce could lead gold higher in the short-term. We will find out later this afternoon if this figure has improved when the latest precious metal CoT reports are released at 3:30pm EST.
Nevertheless, I have built a 10% cash position in my junior resource stock portfolio in anticipation of a possible gold stock wash-out move happening into Q2. One of the best times to take a low-risk position in a quality junior is when a long-term sector consolidation ends with an over-sold capitulation move lower, so it is wise to be prepared if this scenario presents itself.
If you require assistance in choosing the best quality junior resource stocks to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/