Contributed Commentaries
Junior gold stocks explode after gold closes Q2 above $1800
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
In my last column of H1 2020, I was expecting a Gold Futures Q2 close above $1800. Although just barely, Mr. Market delivered as August Gold closed at $1800.50 on June 30th. In fact, gold saw its highest quarterly basis close in history and best quarterly performance in more than four years. With gold futures closing above $1800 on a quarterly basis, this raises the possibility of an eventual test of its record high set during 2011 at $1923 soon.
When a stock or commodity breaks above a long-term resistance level on a quarterly closing basis, it then comes onto the radar of more traders. With Gold Futures making a quarterly basis close above long-term resistance at $1,800, more generalist investors and big money traders are paying closer attention to the entire precious metals complex.
Moreover, the GDXJ has now joined its big brother GDX in printing a quarterly breakout of a 7-year base, and along with silver, has been showing relative strength since doing so. Despite its misleading name, GDXJ is overwhelmingly dominated by mid-tier gold miners, but most generalist investors continue to use this ETF as a barometer for the junior sector.
Big money traders pay attention to important technical levels, which makes the quarterly breakout of the huge base in GDXJ technically significant for the entire junior complex. Since this breakout took place, many of the juniors I follow and/or own have exploded to the upside and any sign of weakness is quickly being bought.
Furthermore, it was also important for silver to finally break through the $18.50 level on a quarterly closing basis. Silver Futures, which have been stuck below this important line of resistance since 2016, finally pushed through this critical level and closed above stronger resistance at $19 on Wednesday.
Meanwhile, many gold & silver juniors have become short-term over-bought after rocketing out of the mid-March bear trap and may sharply correct at any time. But the junior space never even came close to becoming overvalued during the post-panic up-leg and most of these small-cap companies are still vastly undervalued in relation to the gold price.
Yesterday’s trading action in the mining complex was a great example of the collective mind-set of speculators in the junior sector at this time. The previous trading session upside gap printed in the GDXJ was filled to the downside quickly when gold futures tested $1800 intraday on Thursday, then bought heavily into the close although the ETF remains technically overbought.
The extraordinary events of Q2 only reaffirm the bullish outlook for gold, gold equities, and especially the silver complex. The remarkable disconnect between Wall Street and Main Street has continued into the second half of 2020, and markets have rallied sharply due to the unprecedented amount of liquidity injected while most investment funds and big money traders remain under-weighted in junior precious metals stocks.
The key driver for gold prices continues to be rising inflation expectations, as the massive monetary and fiscal stimulus measures by government and central banks works its way into the system. The global fiscal policy response to Coronavirus is over $9 trillion to date, and is expected to climb further.
U.S. House of Representative Speaker Nancy Pelosi said on Thursday that the next coronavirus relief legislation will need to include trillions of dollars in aid for state and local governments. And U.S. Treasury Secretary Steven Mnuchin hinted that a second round of stimulus checks could be part of the government’s next round of coronavirus relief that he expects to be passed by the end of the month.
Moreover, if yield curve control is implemented by the Federal Reserve, economic recovery will create a more negative real yield condition as nominal rates remain fixed during rising inflation expectations. Historically low global interest rates are good for gold (and its miners) that are non-yielding assets.
I strongly believe we have now reached a scenario in the marketplace where if the economy does poorly, gold does well. And if the economy recovers, gold will also do well. The current transition period from economic destruction to destructive inflationary response by policy makers has created the perfect storm for junior gold & silver stock speculators.
Although the gold space is becoming overheated, I expect weakness will continue to be bought in the quality names. There are big money traders and fund managers still sitting on the sidelines who want into this tiny sector.
Now that the breakout of a 7-year base in GDXJ has been confirmed after a quarterly close above $49, there is now limited overhead resistance and the technically measured upside target from this huge base of support is $90. Corrections after a major breakout in this small sector can be short and sharp, so focusing on the big picture is tantamount to not being shaken out of core positions when profit taking ensues.
My goal for the past few years has been to carefully construct a concentrated portfolio of exceptional junior resource stocks in the context of an investment time horizon at least as long as one cycle, which I feel has just begun. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at https://juniorminerjunky.com/subscribe.
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