Miners are Hinting Gold May See a Correction Soon
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
To begin this week, the GDX closed lower on Monday with gold futures rallying to fresh highs. The following day, December Gold nearly reached $1550 before making a sharp $55 intraday reversal when President Trump tweeted delaying the new tariffs on a large batch of Chinese imports. Although the safe-haven metal has stabilized back above $1525 in gold futures, the global miner ETF has continued its non-confirmation and is trending lower after hitting a peak at $30 last week.
While I have been expecting GDX to possibly reach the $31 region along with $1550 in December Gold before a sustained correction begins, the market is flashing signals we may have reached a short-term top in the miners. The monthly Relative Strength Index (RSI) on the global miner ETF nearly reached 70 last week, a level not seen in over a decade when it marked the end of an overextended miner up-leg in 2008. The daily Moving Average Convergence Divergence (MACD) has also been diverging since July and momentum collapsed into the $30.00 high.
The global miner ETF has had a very nice run since hitting a significant low last September 11th at $17.19, gaining nearly 75% in eleven months and is due for a rest. This outstanding performance to the aforementioned extreme overbought levels warrants a sustained correction, which is healthy for bull markets. Periodic corrections will be essential in keeping this new gold bull healthy, working off the excessive greed that builds as gold up-legs become overextended.
Meanwhile, the Dow Jones Industrial Average closed down 800 points on Wednesday, with its worst day of the year. Weak economic data from China, a GDP contraction in Germany, and the first inverted U.S. yield curve in 12 years stoked fears of a recession, as bond yields continue to drop around the world. The ten-year U.S. Treasury yield dropped below the 2-year yield for the first time since 2007 and yesterday, the 30-year bond dipped below 2% for the first time ever.
An inverted yield curve occurs when short-term interest rates are higher than long term interest rates and when this inversion takes place, it has historically increased the odds for a recession. The last inversion of this part of the yield curve was in December 2005, two years before a recession brought on by the financial crisis hit. This is also the second inversion of the yield curve this year, with the 10-year yield falling below the three-month yield a few months ago.
Although inverted yield curves in the past have usually led to recessions a year or two after an inversion takes place, this one has a glaring difference. The recent yield inversions are not being caused by the inflationary impact of rising commodity prices. This is especially true of falling agricultural commodities, copper, and energy prices, due mostly to the escalating U.S./China trade war. Gold, and more recently silver, have been the only commodity winners. But this has more to do with falling global interest rates leading to investors losing faith in global central banks and their currencies, than rising inflation.
Once gold has worked off this extreme overbought situation, global central banks continuance of their collective loose monetary policies should keep the wind at gold’s back, as “the race to debase” moves forward. With one-third of Sovereign debt yielding negative returns, combined with heightened concerns over slowing world economic growth and growing geopolitical turmoil, I expect bullion to hold the former six-year resistance level at $1375-$1400 once an inevitable correction begins.
With the odds of a sustained correction growing in the gold complex, caution is advised in the miners. Traders should consider taking some profit on extreme overbought positions in the precious metals space at this time, while maintaining long-term core positions. The impending weakness in the miners will also give investors who have missed this move a chance to scale into long-term holding positions.
However, many of the juniors that have lagged the recent move higher, may begin to catch up regardless of an imminent correction in the global miners and royalty firms. Therefore, before entering a long-term holding position, each junior should be judged based on its own valuation in relation to a solid floor at $1400 gold continuing to be priced in. I expect Investors who have missed the breakout while waiting for a sustained correction in the miners, will be moving down the junior food chain in search of bargains.
I have been painstakingly researching and accumulating the best in breed small-cap growth-oriented producers, developer/explorers, and early stage micro-cap juniors for the past three years, in anticipation of the recent breakout in the precious metals complex. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.