Capitulation Begins in the Mining Complex
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Featuring views and opinions written by market professionals, not staff journalists.
The “summer doldrums” have been particularly cruel to gold bulls this year with safe haven capital continuing to rush into the U.S. dollar, as opposed to the traditional safe haven of gold. There has also been speculation that Turkey may be having to sell gold recently due to their current severe financial crisis, which would explain the acceleration in bullion’s decline this week. After the GDX lost critical support last Friday at the $21 level, the mining complex began to experience capitulation selling on Monday morning. The global miner ETF sell-off accelerated into a waterfall decline on Wednesday and is now targeting technical support at the $16 level.
Meanwhile, last week’s Commitment of Traders (CoT) report showed large speculators and hedge funds being short gold by enormous amounts, which continues to set an all-time record net-short managed money position for three weeks running. The net-spec position declined to 5.6% or 25K contracts, which is in historical major bottom territory. Since there is no immediate catalyst on the horizon for the metal of kings, the higher this managed money short position runs, the inevitable mean reversion becomes potentially more explosive once a catalyst materializes. When a commodity has a record short position, it will ultimately have record buybacks.
Furthermore, the commercial “hedgers” have been closing out short positions and by now may be getting close to zero. Commercials have a much better track record than speculators in the gold market and a short position close to zero, like we saw in late 2015, is a sign we are near a major bottom. The CoT report is released each Friday but only contains Tuesday’s data, so there is a three-day lag between the report and the actual positioning of traders. This means the futures trading information from Wednesday’s big sell-off will not be included in this week’s CoT release, issued today at 3:30pm EST.
Market sentiment is also becoming extremely bearish with the Percent Bullish among newsletter publishers, tracked by Consensus-inc’s “Consensus Bullish Sentiment Index” , recently dropping to 24% - the lowest it’s been since 2004. Moreover, the Gold Miners Bullish Percentage ($BPGDM) Index is down below 17% bulls this week as well.
Based on the recent CoT report and sentiment research, the gold market is a rocket on the launchpad, waiting for ignition. However, we will need to see a fundamental catalyst before the record speculator short position in gold futures begins to be unwound.
Short term, the biggest potential catalyst would be a reversal in the U.S. Dollar. The euro has become very over-sold with concerns about European bank losses due to their exposure to Turkey. Although the Turkish lira continues to recover some of its recent losses, the euro has yet to move much above support at the $1.13 level in the $XEU. An overdue bounce in the euro would reverse the rise in dollar and therefore, relieve some of the pressure on gold.
Another possible near-term catalyst could be a de-escalation of trade tensions between the U.S. and China. A Chinese delegation will travel to the U.S. for trade talks in late August, China's Ministry of Commerce said on Thursday.
The $1180 level has been breached when a stop-run was triggered below $1200 gold this week, bringing $1140 into play if we close below $1200 on a weekly basis today in the December contract. The miners have been selling off much more than gold this week, which tells me $1140 may come into play early next week. The bad news is the waterfall decline in the GDX could see a $16 handle before bottoming soon, so caution is still advised even though the complex remains deeply over-sold. The good news is capitulation selling in the miners this week is bringing the sector closer to a major bottom.
Since gold lost $1260 on the June Monthly Basis close, I have advised my subscribers and Korelin Economics Report listeners to avoid optionality plays, silver producers, and high-cost gold producers until the gold price can re-claim the $1300 level. If you need assistance in choosing the best precious metal juniors to invest during this capitulation sell-off in the complex, stop by my website at www.juniorminerjunky.com and check out the subscription service.