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The miner bear trap for the ages

Commentaries & Views

For the past week, there has been a huge war being waged in the marketplace. The current deflationary forces are battling the coming inflation central banks are bringing into the system with unprecedented reflationary measures. This tug of war has gold trading all over the place, while refineries are being shut down and both the COMEX & LME have no live trading pits, just computer trading.

U.S. policymakers have offered trillions of dollars of support to both markets and their citizenry in recent days to keep the financial system from freezing up. While investors worry about the economic damage from collective Western government reactions to the coronavirus, most everyone has made a chaotic dash for the exits.

Although these exits were paved with U.S. dollars last week, this week they have been paved with gold which has whipsawed many out of position to take advantage of it by owning miners. Once the deleveraging panic out of gold futures subsided late last week, the price of bullion skyrocketed to begin this week with back to back record single day increases. In just three trading sessions, the safe-haven metal went from critical support at $1450 to crucial resistance at $1700, while bullion dealers have nary an ounce of gold, or silver, for sale.

Meanwhile, the GDX had made a complete recovery for the month of March by this Wednesday, as global markets have begun a much smaller bounce of the “dead cat” variety. In other words, the forced selling nightmare in precious metals stocks investors have been through over what feels like an eternity, is now shaping up to be a HUGE bear trap.

On "Panic Monday" last week, the global miner ETF kissed its lower monthly Bollinger Band, then quickly reversed higher on the day as pandemonium rained down onto Wall Street and our computer screens. The global miner ETF went from a spike low on March 16th just above $16, back to where it crashed from at the $26 level in just eight trading sessions.

With the Western economy having grinded to a halt, while most of us are locked in our homes watching our portfolios being torn to shreds, the GDX has formed a HUGE hammer for this very miserable month of March. Although there are just three more trading sessions left in the quarter, volume has decreased significantly which hints of stabilization coming into the sector.

It makes one wish to have gone to a deserted beach and be off the grid by late February, only to come back to pandemonium one month later. But at least your miner portfolio would be pretty much unscathed, with most everyone else wondering where half of their 401k just went. As mentioned previously in this column, Gold bull markets do EVERYTHING in their power to shake out as many remaining bulls as it can before continuing higher. And this miner bear trap for the ages, which has taken place with rapid speed and effect, has done just that.

However, on the bright side, this incredible price action has most likely created a “V” bottom similar to the low formed in the GDX during the previous financial crisis of 2008. The major low struck in the global miner ETF during the 2008 crisis in October of that ill-fated year was tested the following week. Once doing so, the index went from the spike low at $14.75 to just over $63 by mid-2011 after a similar, but much smaller, U.S. government fueled reflation policy.

It appears as though this time the low was tested the following day, which makes sense as this crisis has taken place much quicker than the 2008 sell-off. It also makes sense that the precious metals sector may have bottomed sooner than the stock market this time as well, while the price of gold is set for its best week since December 2008.

After the GDX bottomed in October of 2008, the stock market continued lower for five long months. Although it is likely the global miner ETF has indeed formed a "V" shaped bottom, it remains to be seen if the stock market bottomed this week. Unless we see another extended deflationary panic move into the U.S. dollar, the reflation trade should fuel both gold and silver higher in the medium to longer term.

Once the global economy normalizes after virus fears subside, global monetary policies will remain loose while fiscal deficits surge. Monday’s announcement by the Federal Reserve to provide “unlimited liquidity” and the U.S. Senate’s decision to unanimously approve the unprecedented $2 trillion stimulus bill late Wednesday evening has brought the reflation trade into equities as well as gold. 

Moreover, the price of oil at levels not seen since 2002 has the outlook for gold miners looking very bright once the gold price becomes less volatile and can maintain a $1550 floor. Fuel is a key operating cost for miners as it is needed to run the giant machines that drill and process massive volumes of ore.

But most gold mines are being temporarily shut-down all around the globe due to government mandates during the COVID-19 epidemic. The most dramatic country wide closure came earlier this week, when South Africa announced its entire production pipeline will be shut down for 21-days, which is unprecedented in its 150-year history.

Mines will be required to come back on line soon for these companies to return to positive cash-flow. Although miners are now historically cheap in relation to the price of gold, some may get cheaper in the short to medium term if the companies with temporarily shuttered operations are unable to come back on line during expected production return dates.

However, after the forced selling in the GDX has created a spike low I feel the worst is likely over, while some backing and filling may be seen during quarter-end book squaring into next Tuesday. There is still an open gap above the $22 level which may be filled during this process. Although a large cash position is still highly recommended until the COVID-19 pandemic plays out, quality royalty/streaming companies and lower cost miners are looking very attractive here.

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.  
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.

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