Miners lagging gold portends more weakness ahead
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As Q3 came to a close on Monday, profit taking and quarter end book squaring by fund managers in the gold space was largely responsible for the safe-haven metal closing below strong support at $1480 on a quarterly basis. With Chinese buying being off market for its Golden Week National Holiday this week, sell stops being hit continued the selling down to the $1465 level the following session.
However, a fresh wave of fear that the global economy will contract in the months ahead has boosted gold’s safety appeal since manufacturing reports from the U.S. and Europe on Tuesday spooked traders and investors back into gold. The same was evident from a selloff in the US equity markets, which provided a strong boost to gold’s traditional safe-haven status and assisted the precious metal to build on this week's bounce from near two-month lows.
Data released on Wednesday showed that the US private-sector employers created a modest 135K jobs in September. The lackluster report came after the US ISM manufacturing on Tuesday registered its worst reading since June 2009 and forced investors to start pricing in a higher probability of a further policy easing by the Fed at its next FOMC meeting on October 30th.
After the U.S. Non-Farms Payroll report was released this morning, algorithm trading in gold is grappling with the economy adding 136,000 new jobs in September, the slowest pace of jobs in four months, as businesses grew more cautious about hiring. Adding to some sense of firmness in the data, employment gains for August and July were revised up by a combined 45,000.
Although gold has been the safe-haven of choice this week, the lack of relative strength in the GDX could be signaling this consolidation process may eventually turn into a stronger correction in the miners before the next up-leg can begin. With December Gold remaining firmly above $1500 and climbing back above its 50-day moving average yesterday, strength in the miners is being sold during this bounce. The global miner ETF has not been able to climb back above its own 50-day moving average, creating a bearish head & shoulders topping pattern.
Moreover, the juniors and silver have begun leading both gold and the miners lower as well. Many of the higher risk juniors I track have been underperforming and the gold/silver ratio has begun to climb back above 85, favoring gold. Historically, during healthy up-legs in the precious metals complex, both the miners and silver lead bullion while significantly outperforming the safe-haven metal.
The recent action in the complex is not surprising, as there is still some short-term excess that needs unwinding given gold’s huge gains over the summer. Although I expect to see a significant improvement in the Commitment of Traders (CoT) report released at 3:30pm this afternoon, last week’s CoT report showed net commercial short positions at the largest level in its 33-year history, while speculators had the second-highest long positions. These kinds of extremities are a big warning signal that speculation has peaked and will most likely take weeks to unwind.
The level to pay close attention to on the downside in gold futures is $1455 and if reached, may coincide with strong support in the GDX at $26 being seen. If we see a close below this important region of support in the safe-haven metal, the bears will set their sights on a possible test of the breakout region at $1375-$1400 and the $24-$25 level in the GDX. This would set up a healthy 50% retracement of the move in gold which began over 12 months ago, while shaking out all the frothiness that has come into the complex over the past few months.
In order to negate either of these short to medium term bearish scenario’s, we will need to see a weekly close above $1550 in December Gold on this bounce, along with both the GDX and silver beginning to outperform on the upside.
I expect weakness to continue in the sector and caution is advised until relative strength returns in both the miners and silver. In the meantime, short-term volatility can be very sharp if the support levels mentioned are broken, so I suggest staying focused on the big picture by maintaining core positions with some cash. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at https://juniorminerjunky.com/subscribe. Although the JMJ service has reached capacity of 250 members, there is a waiting list if you are interested in becoming a member.