Merger Monday Shine Tarnished by FOMC Speech
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
On Sunday evening, Global miners Barrick Gold (ABX) and Randgold Resources (GOLD) announced they have agreed to merge in an all share, no premium transaction which will solidify Barrick as the world’s largest gold company by production. The street reacted very favorably, as the share prices of both firms were bid higher combined with 52-week high volume.
I reached out to a few junior explorer executives for their thoughts on the merger and the positive aspects the deal may have on the sector going forward.
Auryn Resources (AUG.TO) Executive Chairman Ivan Bebek, who has over 18 years of experience in financing, foreign negotiations, and acquisitions in the mineral exploration industry said; “(This is a) Great indicator of the bottom. These types of mergers usually happen at the top or the bottom. The rumor in Denver was that the only way Barrick could get Bristow as CEO was through the deal. Certainly, a shakeup across the industry.”
Revival Gold (RVG.V) President & CEO Hugh Agro, who is the former Executive Vice President, Strategic Development with Kinross Gold Corp. had this to say; “Certainly, we can expect a number of follow on disposal transactions as the Barrick-Randgold portfolio is optimized following the merger.” Mr. Agro continued, “The Barrick-Randgold transaction is good for our industry. It will surface value in the Barrick portfolio. It should attract generalists’ investors to the space and it will lead to a recycling of assets in an industry that has limited “seats on the bus”.
Unfortunately, the industry excitement over the merger was dampened a few days later when the market reaction to the FOMC continuing forward with its rate-hike dot plot was to continue selling gold. Although the Fed dropped longstanding language from its policy statement on Wednesday saying its monetary policy "remains accommodative", gold was not responsive to this omission. The removal of that phrase suggests the Fed could even pause at some point to assess the effect of its actions on the economy and gold’s non-reaction to this was a hint of further selling, which followed yesterday.
Another ominous sign of gold possibly heading lower is its non-reaction to the breakdown in the US dollar last week. The greenback had broken the neckline of a head & shoulders top at 95 in the daily Cash Settle Index with a target below 93, yet gold failed to react to this glaring weakness. Gold’s now six-month decline has been mostly attributed to a rising US dollar. The worlds reserve currency had also been the recipient of safe-haven buying, as opposed to the traditional role gold has historically played in that regard. Bullion not reacting positively to a weak dollar is concerning, to say the least.
Technically, December Gold has failed to have a weekly close above $1211 during this consolidation after the over-night spike low near $1160 in mid-August. A weekly close today below $1194 in the December contract will set up a double bottom possibility below $1170 and would be a hint of the U.S. dollar rally resuming. However, a quarterly close below $1200 next Friday could send bullion down to stronger support at the December 2016 low of $1125 in the medium term.
Meanwhile, I feel the relative strength in the GDX since the low made on September 11th, can be mostly attributed to two factors. The Vanguard Precious Metal Fund restructure being completed and the recent strength of the Barrick/Randgold combined weighting in the Van Eck global miner ETF Portfolio being over 12%. After traders ceased fading the Vanguard restructure by covering their short positions and the fund manager finished selling its shares, both the global miner ETF and silver have been outperforming gold since the GDX printed $17.28 earlier this month. Platinum has also been showing relative strength recently towards gold, which has been another short-term bullish factor for the miners.
Nevertheless, it remains to be seen how gold stocks will hold up if we indeed get a quarterly close below $1200 in December Gold at the end of next week. Although tax-loss selling has begun early in the sector this year, we may continue to see more of this selling in the mining complex heading into the next FOMC meeting in November. Caution is still advised and a large cash position in your junior resource stock portfolio is recommended. Stop by my website at www.juniorminerjunky.com and sign up to be on the free email list. You will receive this column in your inbox each week, along with interviews and updates on my subscription service availability.