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The telling relative miner weakness during a gold bear flag

Commentaries & Views

Although frustrating to gold investors, the precious metals sector selloff to begin 2021 is not all that surprising. This secular gold bull that began after the turn of the century has had a tendency to make false moves in the opposite direction to buck off as many riders as possible before beginning its next up-leg.

After printing a weekly close below former support at $1850 last Friday, gold is creating a bearish flagging pattern on its 200-day moving average support line this week, while silver and the miners have suddenly begun to show relative weakness. Just yesterday, the strength that came into the miners on the back of dovish comments from Fed Chair Jerome Powell were sold into the close as “risk-on” continues in the marketplace.

Powell reaffirmed the Fed’s decision to maintain low interest rates. “When the time comes to raise interest rates, we’ll certainly do that, and that time, by the way, is no time soon,” Powell said while speaking at Princeton University. The Fed Chair also noted that the world’s largest central bank would not raise rates even in the event that unemployment falls “unless we start to see inflation or other imbalances that would threaten the achievement of our mandate.”

Even though global central bank monetary and fiscal policy remain highly supportive, an accelerating recovery and rising inflation at the margin has been counteracted by rising nominal yields. The resultant rise of real interest rates has been a big reason why gold is being pressured towards its November lows of last year.

The recent uptick in longer-dated U.S. Treasury yields, along with the steepening of the closely-watched U.S. 2-10 year yield curve, shows that investors are already looking ahead to the possibility of higher rates dampening potential inflationary pressure. This has been the main reason gold has been selling off, while the shorter term technicals point to lower prices.

Despite the long-term macro fundamental’s remaining bullish for the safe-haven metal, the price action in gold to begin 2021 is telling us further selling is likely to be coming into the sector before we see an end to this now 5-month consolidation process. Technically, the key support levels are $21-$22 for Silver, and $1770 with the possibility of the $1690-$1700 being tested in Gold as we head into the next Federal Open Market Committee (FOMC) meeting on January 26-27. 

During the subsequent speech by Fed Chair Jerome Powell, and the virtual press conference that follows the FOMC meeting on January 27th, gold investors will be focusing on how the Fed plans to address financial stability and market climate under new leadership in Washington.

Meanwhile, the GDX has strong support on its breakout of the 7-year base at the $31-$32 region. And the GDXJ could sell down to the $45-$46 area if we see the aforementioned support level at $1690-$1700 tested on this move. Although I am not predicting this will take place, the strong reversal last week after the false breakout, followed by the relative weakness in silver and the miners to begin this week, is telling us to pay attention and build up some cash in our gold stock portfolios just in case. 

Furthermore, resource stock speculators have been taking into consideration more selling possibly coming into the gold space, as I have seen many examples of a news release being sold into recently. Early-stage juniors that have issued an assay result press release this week, have generally seen investors taking advantage of this liquidity event to sell the stock, regardless of the quality of results.

If the aforementioned gold & silver support levels are indeed tested, I expect higher-risk, early-stage juniors that need to raise cash to fund this year’s exploration programs will be susceptible to the most selling, along with developers de-risking lower margin projects.

The gold bull is doing everything in its power to shake off as many riders as possible before climbing higher. Trimming profits during over-extended moves in your junior positions along the way, while maintaining core positions, will assist you to remain invested in this volatile sector during sharp corrections. 

This is a good time for resource stock speculators to take advantage of the current weakness and perform proper due diligence on a carefully selected watch list of quality juniors. If you require assistance in doing so, and would like to receive my research, newsletter, portfolio, watch list, 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.