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It's the junior's time to shine after major miner breakout

Commentaries & Views

As mentioned likely in this column last week, the GDX has broken out of a multi-year base, while the price of gold continues to rise and is nearing another seven-year high. Once the “bear trap” set last month quickly forced most players out of the precious metals complex, the global miner ETF has broken the 7-year Maginot Line of resistance at $32 this week with many shell-shocked investors still on the sidelines.

After the global dash to cash ended last month, this bullish breakout has the gold miners in sync with the rising price of gold and suggests that both are now heading higher together. In fact, gold miners have recently been rising faster than the metal AND the stock market. The GDX/GLD ratio is trading at the highest level in three years, which means that gold stocks are now rising faster than the metal and that is usually a positive sign for both.

Meanwhile, the GDX/SPX ratio is close to breaking out of its own 7-year base, which indicates investors are selling equities and buying gold stocks. Given all of the uncertainties surrounding the Covid-19 virus and its weakening effect on the global economy, the move into the gold space is another sign that investors remain nervous about the outlook for the U.S. economy and the stock market.

Moreover, silver has begun to join gold despite the oil crash earlier this week while deflationary pressures remain in the marketplace. With as much as 88% of silver being used in non-monetary and industrial applications, having the metal turn higher implies more investment demand returning to the metal.

Since the deflationary panic to cash ended in mid-March, the Global Silver Miners ETF (SIL) has been rapidly closing in on its highest level in three years. Although silver has been struggling to climb back over its 50-day moving average, silver stocks are moving higher with gold miners. Both SIL and the junior silver stock ETF (SILJ) have participated in the sector strength while both have outperformed silver, and SIL has dramatically outperformed the metal.

According the Silver Institute’s annual World Silver Survey, silver investment demand jumped 12% in 2019. This was the highest annual growth since 2015, as retail and institutional investors focused their attention on the long-term investment appeal of the metal.

Exchange-traded product (ETP) holdings stood at 728.9 M oz at year-end, up by 13%, achieving the largest annual rise since 2010. Despite the challenges presented by the Covid-19 pandemic in forecasting silver market conditions over the rest of this year, extended physical demand may drive the metal’s price higher with gold in 2020.

Since the gold price bottomed in late 2015 just above $1000 per ounce, both silver and the more speculative junior equity sector have lagged the gold space. Studying the history of previous gold bull markets, both of these tiny sub-sectors of the precious metals complex have out-performed the big caps and mid-tier miners after a major breakout in the mining sector has taken place.

With the price of gold building a new floor above $1550, global miners will be further starved for reserve replacement and growth, which will require more M&A in the sector. As gold continues to rise, juniors in the process of de-risking large deposits start to become more attractive targets for larger companies which can expect to see the discount narrow on acquisition.

The last two months of 2019 saw a flood of deals in the gold sector as a long-promised consolidation accelerated. At least nine deals were approved or proposed in the weeks leading up to Christmas. This flurry of consolidation was sparked by four non-core asset sales, two each by industry leaders Barrick Gold Corp. (GOLD) and Newmont Corp. (NEM).

Arriving on time before an impulse move begins is critical, as huge gains can be made in the junior space after a major breakout takes place in the mining complex. Once the breakout is confirmed with a weekly close above $32 in the GDX, the technically measured upside target is $50.

In anticipation of this breakout in the miners, I have been completing partial 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.