Contributed Commentaries
Whipsaw Price Action Continues in the Miners
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Gold Bugs were feeling very confident coming into the new year, as the GDX appeared ready to break out of its then 5-month consolidation pattern during the first week of trade in 2021. But after a tantalizing $50 move above gold’s down-trend line, the global miner ETF posted a bearish daily island reversal pattern and the safe-haven metal had whipsawed the bulls by the end of the week.
After showing relative strength into 2021, suddenly the miners were signaling that gold had more work to do on the downside before resuming its climb higher. Bond yields were also rising, forcing more late-comers to the gold party to sell their positions and emboldening gold bears to hunt for stops as the metal broke strong support at $1850.
In an update to Junior Miner Junky (JMJ) subscribers before the 3-day U.S holiday weekend, I stated the following: “There are 6 more trading days in the U.S. until the first FOMC meeting of the year on January 27th., and I fully expect the bears to attempt a stop-run below $1800 as we head into the meeting. If they are successful in doing so, the weakness coming into JMJ juniors will create lower risk entry points for those of you still accumulating positions.”
Then last Monday, with the Comex closed during a U.S. holiday, the bear raid during light trading indeed materialized but failed when strong buying came in at $1800.80. Bargain hunters triggered a short-covering move that forced Gold Futures back above $1850 on a weekly closing basis, which was formerly strong support.
Yet during this battle, the miners continued to show relative weakness, while the higher risk juniors were seeing substantial profit taking into the first FOMC meeting of the year this week. Once the stock market began to sell off during Fed Chair Jerome Powell’s press conference on Wednesday, the GDX tested its November low into the close.
Although the miners sold off sharply as Fedspeak failed to make gold shorts nervous, the action in this oversold sector became much more interesting just before the U.S. market opened on Thursday morning. Shortly after the release of a batch of tier one U.S. data, silver took off and dragged gold with it, amid the increasing talk and speculation regarding what could happen to short sellers in the U.S. stock market.
Just after the release of the aforementioned U.S. data reports yesterday morning, spot silver prices saw a sudden surge higher. The move began when speculation that the Reddit retail trader army, coordinating itself and emanating from the popular sub-Reddit page WallStreetBets, had now turned its wrath onto perceived short-sellers of silver.
The WallStreetBets group is focusing on SLV as their next short squeeze target and the silver ETF was up 5.55% yesterday with huge volume. The futures market is a mix of physical metal and futures trading, but the SLV ETF takes physical delivery of the metal. The idea is that by buying shares in SLV, they could put the pressure on the physical market and make a spike profit, which some already did so yesterday when the silver price sold off into the afternoon.
JP Morgan is clearly the next target of the group after Melvin capital suffered a huge setback recently with GME stock. JP Morgan reportedly holds the largest short position in Silver and a short squeeze will affect them severely. Older readers may remember the Hunt brothers cornering the silver market during the late 1970’s.
The Hunt's repeatedly bought silver futures contracts, but instead of cash settlement, they opted for physical delivery, while at the same time they were preaching about the value of silver as the U.S. dollar was struggling. The result was a spike in silver prices to $50 and they controlled about two-thirds of the entire physical market (excluding central banks).
Eventually, regulators stepped in (like they are doing now on retail-focused brokerages) and prevented anyone from initiating new buying positions in the silver futures market. Although the COMEX did not shut down the silver market to force the Hunt brothers out of silver, they made it much more expensive to be long vs short, coming to the aid of investment bankers as usual.
This army of retail traders has managed to spook shorts in the precious metals complex as month-end book squaring may print a double bottom in the GDX by the end of trading this week. If we see some follow through buying with good volume next week, the odds of the correction in the global miner ETF carving out a sustainable bottom at these levels will increase.
The now 6-month consolidation of earlier out-sized miner gains has seen the GDX correct 27%, while the GDXJ has corrected 28% after a blistering 180% move up in less than 5-months. Historically, major tops and bottoms have been made in the miners shortly before, or after FOMC meetings, while the long-term macro fundamentals remain bullish for the entire PM complex.
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