Gold Remains in a Tight Range While M&A Rumors Persist
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
With the global miner merger rumors continuing to circulate the conference halls in Vancouver this week, February Gold has remained firmly above $1280. After Newmont Mining Corp. and Barrick Gold Corp. forged mega deals that will extend their lead over South African miner AngloGold, Bloomberg reported late last week that Gold Fields Ltd. would like to merge with its larger South African rival AngloGold Ashanti Ltd.
Although Gold Fields denied it’s interested in combining with AngloGold, according to a statement issued to the Johannesburg Stock Exchange on Tuesday, the merger would make sense as the two miners operate in similar jurisdictions. This is not the first time a combination of the two companies has been proposed. The Gold Fields CEO was reported in April 2010 to be open to consolidation with AngloGold, while the two miners also weighed a merger in September 2006.
Another rumor circulating during Conference Week in Vancouver was global miner Kinross and mid-tier gold producer IAMGOLD having merger discussions. Although this rumor has yet to surface in the media, I expect more global miner deals to take place as mergers and acquisitions are easier than exploring for new deposits. With gold still well below strong resistance at $1375 for over five years running, mining companies are struggling to compete for lower costs while trying to replenish their reserve base. It is a much easier alternative for global miners to entertain a merger with a competitor, as opposed to searching for large deposits with depleted exploration teams.
Meanwhile, the gold price continues to work off its overbought situation by trading sideways into the first FOMC meeting of the year next week. After breaking down from a 2-week pennant formation last Friday, February Gold refuses to close below what has become strong support at the $1280 level that was tested for the sixth time yesterday. As mentioned in last week’s missive, I expect this sideways action to continue until we hear from the Fed next Wednesday.
Unfortunately, traders have been unable to view the Commitment of Traders (CoT) reports, which have yet to be issued this year due to the partial U.S. Government shutdown. The CoT reports show what positions major traders are taking in a number of financial and commodity markets. These reports allow small investors to see what larger traders are doing and assist in possibly positioning themselves accordingly.
Nevertheless, what may assist gold in breaking out to the upside, is the resumption of selling in the stock market. The S&P 500 has risen an impressive 14.5% since the first trading day following the start of the U.S. Government shutdown. But that may change as soon as next week, with the Trump administration itself now warning that the shutdown could bring first quarter growth “very close to zero,” if it continues deep into the first quarter.
Although the S&P 500 has taken out its 50-day moving average, it is now just approaching the downtrend line from the highs. Bear market rallies are designed to bring as many investors back into the market as possible and this bounce may be running out of steam. If the stock market does indeed roll-over here, I expect more safe-haven buying to come into the gold complex.
Furthermore, a potentially bullish technical situation has taken place in the gold sector this week against the backdrop of neutral sentiment and dwindling investor interest in bullion. A “Golden Cross” has formed on the daily gold chart, which occurs when the 50-day moving average crosses above the 200-day moving average. Although this is not a guaranteed bullish scenario for an immediate extended move higher in this volatile metal, this moving average crossover means the market in question has moved into an uptrend after a longer-term period of consolidation.
However, the gold price has held up better than its miners. After failing to hold above its 200-day moving average, the GDX has broken this line and is now attempting to base above its rising 50-day moving average. The global miner ETF needs to begin leading gold soon, or it could be in danger of re-testing its lows below $18.
The quality Junior gold stocks continue to sell at attractive discounts relative to historical measures even as gold prices have bounced back 10% from their 52-week lows. This is offering investors unique opportunities to buy higher risk equity assets, which are trading at lower risk valuations. Since gold stocks have been mired in what has technically become an extended bear market, these beaten down equities could hold or even rise in value in the case of a prolonged bear market in equities or recession.
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