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Bullish miner rotation in play as GDX tests its breakout level

Commentaries & Views

As I type this missive, August Gold is being sold down towards support at $1675 after the U.S. Non-Farms Payrolls (NFP) report released this morning showed 2.5 million jobs were created in May. According to consensus forecasts, the data significantly beat expectations as economists were expecting to see job losses of around 7.75 million workers. The unemployment rate of 13.3% in May was also much better than market expectations and the results have investors bidding up equities this morning, while the gold space is being sold.

With risk appetite back into the marketplace, downside pressure may remain in the safe-haven metal as we head into the Federal Reserve Open Market Committee 2-day meeting next week. And a weekly close below $1675 in gold futures later today would set up a possible test of $1650 before the meeting takes place.

Meanwhile, the GDX is attempting to hold its 50-day moving average this morning, while the process of a healthy consolidation of recent gains continues. After a 130% move in just ten weeks off its bear trap low made in mid-March, the global miner ETF is taking a much-needed rest, which has resulted in a 16% correction thus far since topping at $37.49 on May 20th.

There is strong support at the GDX breakout region of $30-$31 and a test of the $30 level would be a 20% correction, along with also being a test of the breakout from a 7-year base that took place in April. The corrections during the 2008-2009 bottoming process often ranged from 17%-23%, therefore, we could see the rising 200-day moving average just below $29 possibly tested before this correction ends.

Although we have seen safe-haven bids coming out of the gold space recently, central banks continue to do their part in keeping the metal well bid by injecting historic amounts of liquidity in new and creative ways into the global economy, which is being coupled with massive economic stimulus.

The European Central Bank (ECB) approved yet more stimulus on Thursday to prop up an economy plunged by the COVID-19 pandemic into its biggest recession since World War II. Just months after a series of emergency measures, the ECB said it would increase the size of emergency bond purchases by 600 billion euros, to 1.35 trillion euros. And that the purchases would run until the end of June 2021, which is six-months longer than originally planned. The move comes as the ECB sees economic growth falling 8.7% this year, according to its latest economic projections.

The central bank also said it would reinvest bonds maturing in its pandemic emergency purchase scheme at least until the end of 2022. As the economic downturn runs deeper and longer than expected, governments are running record deficits to cushion the impact of the pandemic, putting a greater burden on the ECB to soak up this new debt and keep borrowing costs manageable.

Both the European and Japanese government, who just last week approved a stimulus spending package of $1.1 trillion, have destroyed their bond markets with seemingly never-ending negative interest rates and are unable to issue bonds that institutions will buy at these insanely low rates. Thus, these central banks have become the buyers of last resort which has overseas safe-haven capital fleeing into U.S. equities.

After the conclusion of the FOMC meeting next week, we will hear an economic policy update from Federal Reserve Chairman Jerome Powell at 2pm EST on Wednesday, followed by a press conference at 2:30pm. Although we are seeing the U.S. economy begin to snap back much faster than expected, I expect the Fed to tread lightly regarding backing off from stimulus programs. With U.S. rates back at zero and negative in much of the world, it's unlikely that the world’s largest central bank will risk tightening until inflation is entrenched, which has historically been the primary tailwind for gold and silver prices.

Meanwhile, more clues are emerging from the precious metal’s equity space that this miner correction may be coming to end soon. Both the GDXJ and the Silver Junior ETF (SILJ) have been showing relative strength during the correction, by outperforming the global miners and royalty/streaming companies.

Moreover, the amount of hefty bought-deal financings into juniors de-risking large projects have continued to grow this week, while also being upsized on occasion. And in some instances, upsized deals are being announced just a few hours after the initial bought-deal press release has been issued.

I have spoken with management of a few of these companies, and some have informed me there was much more money available if they wanted it. But CEO’s of juniors who are aligned with shareholders by holding large blocks of their company’s stock, fear over-dilution and therefore, accept only the funds necessary to de-risk their projects into the next level.

Over the past few weeks, precious metals investors have been taking profits in senior mining firms and rotating them into smaller producers and developers, where valuations remain attractive and liquidity has started to improve. Historically, as bull markets mature, the higher risk smaller companies outperform, particularly since M&A activity has increased.

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