Miners Continue to Consolidate During Q3 Earnings
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Last week, two of Canadaâ€™s largest gold miners reported losses for the third quarter, continuing a disappointing run that has seen the industry struggle to attract investors. Barrick Gold (ABX) reported a $412m net loss due to a $405m impairment on its Lagunas Norte project in Peru, while Goldcorp (GG) swung to a $101m loss from a net profit of $111m a year earlier. These disappointing results were a major catalyst for the breakdown in the miners experienced last Thursday. Goldcorp lost nearly 20% on the day of the release, which has the beleaguered global miner trading below the sector bottom in early 2016.
In the junior miner space this week, Guyana Goldfields (GUY.TO) share price was cut in half and trading was halted after the company released its Q3 report. The junior announced it has initiated a review of the underlying resource model and 2018 gold production guidance was revised downward from 175,000-185,000 to 150,000-155,000 ounces. The firm stated the reason for the lowered guidance as being grades have not rebounded as quickly as anticipated in the fourth quarter. Just a few hours after the release, the company announced the resignation of Patrick Sheridan from its Board of Directors. The share price of GUY.TO was one of only a handful of junior miners whose share price rose during the previous bear market into the end of 2015.
Before Q3 earnings began to come in last Thursday, both the GDX and the GDX/GLD ratio were flagging a breakout from a bullish 8-week inverse head & shoulders bottoming pattern on their respective daily charts. Although December Gold has not formed the same technical bottoming pattern, it too was flagging the huge move made on October 11th. However, once global miner Q3 reports began coming in last week, the GDX broke down and began to trend sharply lower with equities as gold remained flat.
Global stocks started the new month on firmer ground after a brutal October, bouncing the GDX off uptrend support yesterday along with precious metals. Gold futures settled up $23.60, or 1.94 percent, at $1,238.60 on November 1st. The move was influenced by a sharp correction in the U.S. dollar on the back of a possible U.S. trade deal with China. Until yesterdayâ€™s sharp reversal, the worldâ€™s reserve currency had made a new year to date high on the Cash Settle Index into the monthly close. Â Â
This morningâ€™s Non-Farm Payrolls report (NFP), a key indicator of the strength U.S. economy, generated a robust 250,000 new jobs in October, keeping the unemployment rate at a 48-year low and pushing the increase in worker pay to the highest level in more than nine years. The strongest labor market in decades is powering the U.S. economy that is likely to set a record for the longest expansion ever by next year. Steady work and rising income should influence the Fed to maintain its rate rise dot plot into 2019, keeping pressure on gold.
Next week, there will be two more sector catalysts with the U.S. mid-term election on November 6th, which will be followed by the next FOMC meeting on November 8-9th. Since we had a weekly close below $19.50 in GDX last week, there is now a possibility the global miner ETF could test the September 11th low soon. And if that low of $17.28 is broken, we may see the $15 level before year-end. To invalidate the November/December bearish outlook in the mining complex, GDX would have to close decisively above the $21 level on a weekly basis.
I believe the rash of disappointing Q3 financial reports being issued by some of the global major and mid-tier miners may have brought increased managed money short interest into the sector. This possibility, combined with tax-loss selling into the last FOMC meeting on December 18-19th, could place more pressure on gold stocks and test, or possibly break, the September 11th low in the GDX at $17.28. Expectations for a fourth rate hike this year at the December meeting has dropped from 85% a few weeks ago to 65% priced into the market, so there is room for this number to rise further and keep pressure on the price of gold.
In anticipation of this possibly being a false bottom in the GDX, caution is advised and I recommend a large cash position in your precious metal portfolio. 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.