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Cash is king and gold is sold as miners shut down operations

Commentaries & Views

Panic selling on Wall Street went across the board this week, with the Dow Jones Index losing around 6% and taking the index below 20,000. The Dow has now lost roughly one-third of its value since the market high in mid-February, while the combined western government response to the COVID-19 virus has resulted in a financial market meltdown of epic proportions.

As the confidence in government and central bank measures to halt the financial crisis has disintegrated, a massive sell-off in all asset classes has taken place. Stocks, bonds and precious metals have all been sold in tandem, with the proceeds being placed into the U.S. dollar, which means that efforts by global central banks to lower interest rates and ease the constrictions in credit markets are being undermined by the rise of interest rates in the bond market.

Interest rates are also coming under upward pressure because of the recognition that the measures being prepared by the Trump administration for a stimulus package have been almost entirely aimed at trying to prop up corporations. Investors also fear this will lead to the issuance of more government bonds, sending their price down and the yields higher.

These have been turbulent times for gold to say the least, which has quickly lost its safe-haven status with futures market speculators selling positions to raise cash as well. Small speculators and hedge funds, who have been piling into gold in record numbers on the long side while being levered up to 30-1, have been deleveraging to build up cash. 

Markets have been whipsawed in recent weeks and gold has not been spared, as investors sold the metal to cover losses elsewhere and the dollar surged. The CBOE Gold ETF Volatility Index, a measure of expectations for price swings, is at the highest since 2008. After testing critical support at $1450 during the panic selling which ensued in the marketplace on Monday, bullion then reversed on the Trump/Fed reflation news to quickly back-test critical resistance at the $1550 level the following session, then sold off again intraday.

But as I type this missive, investors appear willing, for now, to put their faith in vast stimulus moves from central banks and governments to shore up economies against the fast-spreading coronavirus pandemic. U.S. stocks, along with the precious metals complex, are bouncing strongly this morning after a collective effort from Central banks and governments speeding up efforts to cushion the economic blow already being seen by the coronavirus pandemic, which has ground many industries to a halt.

Gold has reclaimed the $1.500 region, while extreme oversold silver is pushing back towards the $13.00 level. But the gains may not last into next week, as we might see a renewal of volatile trading after what could be a weekend of difficult coronavirus headlines from Europe. Infection and death rates continue to climb in locked down countries such as Italy and Spain. Cases are also rising across the U.S., where California’s 40 million residents have just been placed on a statewide lockdown and ordered to stay home as much as possible in coming weeks.

Meanwhile, the miners also continue to trade with extreme volatility. The HUI Gold Bugs Index dropped from 199 to 176 during the last 35 minutes of trade yesterday, while the GDX back-tested its $25 resistance level before selling down hard into the close. With trading action this volatile intraday, it is best to put your hands in your pockets and wait to see how the current coronavirus crisis and pandemic play out before investing in miners just yet.

Furthermore, we may not see the developers and explorers follow the miners higher once an established bottom takes place until late spring/early summer. Non-cash flowing juniors consume capital, as they explore and/or develop projects. With this extreme deflationary panic into cash taking place and the western world being in full lock-down mode, much of the mining industry has been shuttering mining operations and shutting down exploration sites.

Moreover, the smaller junior companies low on cash may have a difficult time catching many bids until virus fears diminish, which may not take place until late April or early May. The capital markets were already very selective before the crisis began, so I expect only the highest quality projects to be financed for the remainder of this year. Because of this, I also expect to see more consolidation in the junior space out of necessity, as the deflationary pressures on micro-cap juniors that require financing mount.

On the bright side, however, I expect this crisis may finally eliminate many of the "lifestyle" juniors from the TSX-V that has needed to take place for quite some time. Although most of these companies were saved by the “fund everything” days of H1 2016, I do not expect capital markets to be so quick to fund marginal projects with the fallout of this crisis unable to be determined for quite some time.

There is no comparable modern model to analyze how a situation such as what we are experiencing may play out regarding the precious metal’s stocks. With the extreme volatility in the marketplace brought on by investor uncertainty over the COVID-19 pandemic, it is impossible to gauge whether the low seen in the GDX on Monday is a bottom that may be tested again, or even if it is a bottom.

Once normalcy returns to the marketplace, however, I will be accumulating miners as long-term holding positions. Since this global crisis began, I have been frequently alerting subscribers on the rapidly changing macro situations and volatile trading action in the marketplace.  If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.  

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