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Juniors showing relative strength during miner consolidation

Commentaries & Views

Gold prices came into the month of August with a full head of steam, setting a fresh all-time-high at $2089 on August 6th. But, that first week didn’t close with strength and produced a bearish engulfing candlestick after the sector was extreme overbought for 15 consecutive trading sessions.

For the past three weeks, the PM complex has been mired in a healthy corrective phase. After reaching a frothy over-bullish and extreme over-bought situation on August 7th, with a daily RSI above 90, gold futures have consolidated above its former 2011 all-time high of $1920. 

Since the gold "flash crash" on August 11th, price action has been fairly mean-reverting with support in the $1920 area holding thus far during this week’s volatility created by the Global Central Bank Economic Symposium. Fed Chair Jerome Powell kicked off the 2-day virtual conference on Thursday morning by introducing a new policy framework, allowing for average inflation targeting while prioritizing employment over price rises. 

Gold price action generally intensifies around the annual Jackson Hole Symposium and Gold Bulls initially took the metal higher after the announcement of seeking inflation to average 2% over time. But then sellers came in quickly and took the price over $70 lower after noting the inflation overshoots could be moderate. Treasury bonds were sold aggressively once this statement was made and as a result, boosted bond yields that caused more profit-taking in the precious metals complex. 

While the Fed will likely need to ramp up their asset purchases to support the economy, Chairman Jerome Powell did not provide any signs this will happen during the next FOMC meeting on September 15-16. The dollar rose sharply on this omission and the gold trade was quickly abandoned, although still trading within its recent trading range above its 2011 high of $1920 which is now acting as support. 

Yet, Powell explicitly stated that ensuring low unemployment will take priority over price stability, which means lower rates for the foreseeable future. He also noted that “if excessive inflationary pressures were to build or inflation expectations were to ratchet above levels consistent with our goal,” the central bank wouldn’t hesitate to act.

"I wouldn't be surprised if interest rates are still zero five years from now," said Jason Furman earlier this week, a former chief White House economist and now Harvard University professor.

The bottom line is the Fed is all in to support the economy by focusing on employment and ignoring inflation. That is positive for the precious metals complex and detrimental for the U.S. dollar.

Meanwhile, both the GDX and GDXJ have tested their respective 50-day moving averages heading into the month-end close next Monday. A monthly close above $1920 in December Gold may be required for this important line of support to hold in these miner ETF’s. Otherwise, if the $1920 level in gold futures is breached on a monthly closing basis, there is stronger support at $36-$37 and $51-$52 respectively.

Although the GDXJ has corrected 16% since peaking on August 5th, the higher-risk juniors have been showing relative strength and most individual issues remain undervalued in relation to both precious metals, and their miners.

Once upon a time, the Van Eck Junior Miners ETF (GDXJ) was a somewhat reliable barometer for junior gold stocks. But in early 2017, the enormous amount of new money that began coming into the fund forced its managers to perform a major rebalance and expand what it considered to be the junior gold stock universe.

Therefore, once the GDXJ had sold most non-indexed junior gold stocks and increased the fund’s position in larger market-cap senior and mid-tier miners that trade with much more liquidity, the supposed “junior” ETF ceased to be a reliable barometer for the relatively niche, small-cap junior resource complex.

Moreover, only half of the Canadian TSX Venture exchange listings are comprised of small and micro-cap junior exploration and mining companies, which makes this composite index an unreliable junior gold stock gauging indicator as well.

For the past few years, my goal has been to carefully construct a concentrated portfolio of no more than 30 exceptional junior resource stocks, which I also use as a weighted average index for gauging the junior sector’s performance for my subscribers.

While the GDXJ has corrected 16% over the past three weeks, the real-money Junior Miner Junky (JMJ) Portfolio of 29 higher-risk juniors has basically traded flat on an average weighted basis. Additionally, a handful of these juniors are posting 52-week highs during the sector correction.

With both declining gold reserves and a lack of new gold discoveries in the sector, speculators have been rotating recent profits made from the seniors and mid-tier miners into quality juniors. The severe lack of new major discoveries is a result of global miners focusing on advanced-stage assets and known deposits, rather than searching for new discoveries. 

These two factors continue to threaten the long-term outlook for many senior producers. During the consolidation of recent gains in the mining space, investors have been positioning themselves into juniors that control large deposits which they expect to be eventually acquired by global mining firms for large premiums once M&A in the sector inevitably picks up again.

Moreover, additional grassroots exploration is needed to ensure the pipeline has enough quality assets required to replace aging mines. The value placed on the earlier stage juniors has also been increasing recently, as they emerge as the primary source of new reserves for majors. While most grassroots exploration projects have been on hold for nearly a decade, gold's recent rise into blue-sky territory is bringing risk capital back into the sector. 

With hundreds of millions of dollars flowing into junior explorers and developers since the COVID-19 crisis began, numerous fully funded exploration and development programs are now underway. I expect the news flow from drill results and corporate updates on these programs to increase in the fall.

Once the first new major discovery is made, big money will move into high-quality junior gold stocks, enabling valuations to rise across the entire junior resource complex. If you require assistance in choosing quality take-over candidates in the junior space to invest and 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.