Gold Stocks Have Been Quietly Bottoming
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Based on the trading levels and decreasing volume in the GDX over the past 18 months, the precious metal miner sector has been drifting listlessly sideways and totally devoid of excitement. Gold stock volatility levels are dropping down to unsustainably low values and periods of low volatility lead to sharp moves. The major miner ETF opened this week in the $22 region, which is the same level it was trading when gold was nearly $150 lower in late November of 2016. We have yet to see one of the huge impulse move up-legs which gold stocks are famous for since the first half of 2016, so most traders have given up and shifted speculative capital elswhere.
However, since the initial panic move down in global equities ended on February 9th, the GDX has been carving out a rounded bottom on the weekly chart. While the day to day trading in the gold space continues to be frustrating, the downside selling pressure has been decreasing and weakness is being bought in the miners. We have seen safe haven capital coming into the gold space while global geo-political tensions and monetary concerns have spooked investors.
Rather than a spike low, which would imply a lot of heavy selling pressure, the action in the GDX of late shows a potential bottom materializing out of boredom and neglect. Sometimes, in a market that is quietly drifting lower with little volume, money just leaves and seeks out other areas with the perception of higher returns. When enough money has exited the sector, there is not enough selling power left to drive down prices much further and the market creates an exhaustion bottom.
If we indeed have a bottom in place, once the GDX closes above the $25 level, it would confirm a breakout and potentially bring a massive amount of capital into the sector. The $25 region in the global miner ETF could be synonymous with major resistance at the $1365 level being closed above and held on a weekly basis in gold. This week, the critical resistance at $1365 was tested for the third time this year and would constitute a major breakout if/when it closes above this level. Any move above $1365 would likely target at least $1450 in Gold and the $31 region in the GDX.
The gold miner sector is so small relative to broader stock markets that even minor shifts in capital flows can drive enormous gains in a relatively short amount of time. A long-term consolidation in the tight range of $21 to $25 in the GDX has now entered its 16th month, making the miner sector a coiled spring and ready to explode higher once the market is convinced the $1365 level in gold will become the new floor, as opposed to critical resistance. The continued failure at this level in bullion has been instrumental in keeping most speculators out of gold stocks, making them the last deep value play left in a world where most everything else has become over-valued.
The longer this basing pattern in the miners continues, the greater the potential up-leg when more investors return to this forgotten sector. Since it is my contention that the miners are bottoming, time could very well be limited for investors to get into the individual gold stocks with superior fundamentals before they begin an impulse move higher. 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/