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Margin call selling has gold stock breakout on hold

Commentaries & Views

With the GDX set to break out of a 7-year base coming into the week, miner frustration has continued for gold bulls with the safe-haven metal remaining above $1600. As mentioned in this column last week, the global miner ETF was technically set to break out of a 3-year cup & handle pattern while gold was trading at 7-year highs. Precious metal stock speculators have been patiently waiting for this breakout, as bullion has been soaring out of its own 6-year basing pattern since last summer.

However, more patience will be required while the sudden “sell anything with a bid” mentality has investors fretting over the spread of the COVID-19 epidemic outside of China continuing to spark selling in global equity markets. Panic selling coming into the marketplace this week has investors taking profits in precious metals stocks in order to meet margin calls and offset losses elsewhere.

Moreover, the riskier micro and small-cap juniors have seen even more selling, as the TSX Venture (CDNX) exchange has been hit with a nearly 11% loss this week. The exchange appeared to be forming a technically bullish 6-month inverse head & shoulders bottoming pattern into this week, which has been quickly negated during just four trading sessions. Unless we see a bounce today back above $525, the TSX-V will make a multi-year closing low on the monthly chart that is also in danger of reaching its 2016 low in the near-term.

The dichotomy of the GDX being close to breaking out of a 7-year base, while the CDNX is trading near bear market lows from late 2015, has junior resource stock speculators frustrated to say the least. Although there has been more than a handful of junior success stories, much of the sector has not been able to catch many bids even as gold continues to climb.

Meanwhile, gold has been in consolidation since Monday’s spike to nearly $1700 and support at $1620 is being tested early this morning. When yields on 10-year U.S. treasury bonds dropped to 1.235% earlier this week, which is the lowest in more than 100-years, gold came within $9 of the $1700 mark. But yesterday, risk aversion resulted in a market panic that has investors finding cash and very liquid assets attractive.

On a closing basis, the S&P 500 has now lost -12% from its February high which puts it in correction territory (more than -10%) and yesterday marked the Dow’s largest single-day decline in history after it plummeted 1,190.95 points (-4.42%). This sharp decline has the CME FedWatch Tool pricing in a 73% probability of a .25 basis point rate-cut during the next FOMC meeting in 19 days and trimming an extraordinary three-fourths of a percentage point by September.

The Federal Reserve may need to move aggressively to cut borrowing costs to cushion the economy from the rapid spread of the new coronavirus, in part because interest rates are already low and so is inflation. The 2-year yield is at 1.11%, putting the Fed 2+ rate cuts behind the market. When Fed Chairman Jerome Powell addressed Congress two weeks ago, he declared “‚Ķpolicymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn.”

Furthermore, Chicago Federal Reserve Bank President Charles Evans stated on Thursday that the Fed “must be prepared to rely on unconventional tools” in the event of a recession. Evans believes that the Fed should employ Quantitative Easing (QE) and forward guidance if conditions permit. In regards to inflation, the bank president notes that the 2% objective is attainable, but stated that “periods with above-target inflation are essential to achieving the dual mandate goals over the long run.”

The increased volatility in the resource space will make for an interesting Prospectors & Developers Association of Canada (PDAC) convention next week, which I will be attending. Each year, the world of mining and metals converges on Toronto for the world's most comprehensive exhibition of the industry. In 2019, the PDAC featured more than 25,000 attendees and 2,500 investors from more than 130 countries.

However, I expect attendance to be down this year due to the COVID-19 virus fears and each email I have received from the organizers has included the following disclaimer: We are paying close attention to direction from the World Health Organization, Public Health Agency of Canada and Toronto Public Health. The Government of Canada has expanded its travel health notices. Please ensure you have the latest information and advice before departing your country of origin. We will provide further updates to attendees and participants accordingly. Learn more

On Sunday afternoon, I sent out a profit-taking alert to my subscribers, along with a warning of imminent danger coming into the marketplace. With global central banks still trying to gauge the ultimate impact of the illness on the world economy, this uncertainty will likely see trader and investor fears continue to rise into the weekend.  

With the GDX beginning its breakout during the Monday gold surge, forced margin call induced selling began to reverse its breakout and the global miner ETF has now created a nasty reversal candle on the weekly chart. In order for the possibility of a near-term breakout to remain valid in the short to medium term, the $26 level of support must hold on a weekly closing basis.

The daily Volatility Index (VIX) closed at 39 yesterday, which is its highest reading in two years. That puts the "fear gauge" higher than its peak reached at the end of 2018 when stocks were down nearly 20%. While gold consolidates recent gains above $1600 support, holding some cash and physical gold is strongly advised until we see how this global equity panic plays out.

My goal for the past few years has been to carefully construct a concentrated portfolio of exceptional junior resource stocks, in the context of an investment time horizon at least as long as one cycle, which I feel has just begun. 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
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.