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Miners on the verge of breaking out of a multi-year base...again

Commentaries & Views

Heading into 2020, as the price of gold was seemingly in the process of creating a new floor at $1550, I was expecting a break-out in the GDX above the $31-$32 level from a nearly 7-year base. Both the miners and silver were leading the safe-haven metal into the new year. This has historically been something which consistently needs to take place for a healthy bull market to continue in the gold complex.

Just seven weeks later, the global miner ETF teased investors yet again as the $31 level was indeed breached, but then reversed lower as it did nearly four years ago in August of 2016. The GDX has yet to print a weekly close above $31 since March of 2013, when the price of gold futures was trading $200 lower than yesterday’s close.

In hindsight, gold stocks were beginning to factor in the ramifications of global government responses to the coming COVID-19 pandemic while at that time, China was in the process of locking down major cities. Once the miners and silver reversed course and began leading the gold price lower in late February, the die was cast for the false move down in the gold complex, as cash became king during the panic that ensued in the entire global marketplace.

I have been intimately following and trading the gold complex for the past 18 years. Before this tiny sector is about to embark on a major up-leg, there is usually a false move lower to induce as many participants to sell out of his/her positions before moving sharply higher. After this false move in the opposite direction occurs, the sector inevitably breaks out to the upside with fewer early riders participating during the next bull move.

Once caught completely out of position by panic selling at or near the lows, investors are shell-shocked. As the sector quickly begins to create a “V” shaped bottom, most miss getting back into the sector until after the shares they sold are trading at much higher prices. This is exactly what has been taking place over the past few weeks, when I mentioned the recent “bear trap” that had occurred during peak crisis in the marketplace into mid-March.

The GDX went from a false breakout above $31, to a false breakdown to $16, then back to knocking on the door of a breakout again in just eight weeks. This whipsaw action is basically what took place in the ETF during the financial crisis in 2008-2009, but the time frame was over a year in duration!

However, silver and the juniors have remained in a bear market since 2013. Although we have seen more than a few success stories in the junior space, most are trading as if the gold price were still below $1400. Once the bear trap induced all the weaker hands to sell juniors which consume capital, as opposed to miners with cash-flow, many of the best in breed junior developers and explorers have yet to catch up to where they were trading before the breakdown.

The gold price is already trading at all-time highs in every major currency except for the world’s reserve currency. With both the Canadian and Australian dollar gold price above $2500, lower-grade, large bulk tonnage deposits located in both of these countries are now economic as the market prices in a new floor at US$1550.

Both miners and developers who control large deposits in these countries are poised to benefit from significantly lower local currencies and decade low energy prices. 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.

With the Federal Reserve now going down the Modern Monetary Theory (MMT) road, which will ultimately lead to stagflation, gold stocks are beginning to spark the interest of investors. Once the GDX breaks out of this huge 7-year base, the discrepancy in valuation between the larger companies and the smaller juniors will become more apparent.

With the major miners and royalty firms having out-performed both silver and the juniors during this "V" bottom recovery thus far, I expect both to catch up soon on their way to eventually outperforming big cap gold stocks as they have done so during previous up-legs.

Once the impending GDX breakout takes place, generalist capital and momentum players will come flooding into this tiny sector. History has shown it is best to be positioned properly in quality juniors before an impending breakout takes place to take full advantage of this scenario. 

Now that industry leaders Barrick Gold Corp. (GOLD) and Newmont Corp. (NEM) have broken out ahead of the sector, researching undervalued junior options to invest before the coming breakout in the GDX is highly recommended.

Once the sector breakout is confirmed with a weekly close above $32 in the global miner ETF, many of the higher-risk juniors will begin to catch-up quickly as investors seek value down the gold stock food chain. I have been accumulating entry positions in quality juniors over the past few weeks. 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.