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Subtle hints the miners are carving out a sustainable bottom

Commentaries & Views

Unprecedented global stimulus measures, negative real rates, and a weakening dollar pushed gold futures to a record high of $2,089 per ounce six months ago. But after printing a quarterly basis close above $1800 for the first time in its history in Q2/2020, the safe-haven metal blew past the former all-time high of $1920 seen back in 2011 and became technically extreme overbought in the process.

During the first phase of a secular gold bull market that began at the turn of the century near $250 per ounce, a key futures contract traded at roughly $2000 by 2011, which has since become a very significant round number. After becoming extreme overbought during this newsworthy event of finally breaching $2000 per ounce last August, the gold price has been consolidating earlier outsized gains from that same $2000 price zone.

Gold tends to react violently at round numbers like $500, $1000, and $2000. Just before the Global Financial Crisis (GFC) took place in late 2008, the $1000 level was breached briefly in March of 2008 and became extreme overbought.

After quadrupling in price from a significant low of $250 in 2001, the move ended abruptly once gold breached $1000 per ounce on a daily basis. This newsworthy event quickly reversed the course of gold before the GFC began and moved the price of bullion over $300 lower before printing a significant “V” bottom seven months later.

Once the gold price moved swiftly down below $700 six months prior to the GFC ending in March of 2009, it took the safe-haven metal another year to blow through the $1000 level. The major catalyst to finally get past this significant price point was the Federal Reserve re-capitalizing the U.S. banking system with the printing press. 

However, the bank reflation during the GFC pales in comparison to the central bank of the world’s reserve currency having dived head first into the ocean of Modern Monetary Theory (MMT) since March of 2020. The basic principle of MMT is that the U.S. federal government, through the Federal Reserve, prints as much money as politicians require to “Build Back Better” economies that lockdowns have destroyed.

When we get inflation as the consequence of these actions, the solution is to tax the rich to slow it down. But the main ingredient missing from this theory is the question of global debt, which has reached nearly $280 trillion and climbing at a more rapid pace since the pandemic began.

Thus far, the Federal Reserve’s balance sheet is ballooning towards $8 trillion, while Fed Chairman Jerome Powell stated this Wednesday that the U.S. is “a long way” from pre-pandemic levels of employment. Although official unemployment stands at 6.3%, Powell noted that the data is “dramatically understated” and believes it is closer to 10%.

Furthermore, Treasury Secretary Janet Yellen is not concerned about the impact the proposed $1.9 trillion coronavirus stimulus package may have on inflation. Yellen stated that the biggest risk would be to “leave workers and communities scarred by the pandemic,” and believes employment could reach pre-pandemic levels by 2022 if more stimulus is provided.

Meanwhile, the U.S. House of Representatives will vote on the bill on February 22nd. It will become necessary to pass the bill by mid-March, when enhanced jobless benefits approved in a December 2020 aid package expire.

Once the $1000 level in gold was breached on a monthly closing basis in late 2009, the safe-haven metal nearly tripled in three years from a spike low at $681 that was reached during the deflationary crisis in October of 2008. If we apply the same time-frame after gold made its deflationary induced spike low in mid-March of last year, the $2000 price level could be breached on a quarterly closing basis next month.

Over the past six months, bullion has spent most of its time in a correction process between $1800 and $2000 per ounce. Despite the macroeconomic fundamentals remaining firmly in place to maintain this gold bull market, this healthy consolidation process of earlier outsized gains has frustrated both bulls and bears alike.

Much like the rise to $1000 in 2008, the gold complex reached frothy sentiment levels and a technically extreme overbought situation in August of last year. Since then, gold futures have mostly remained above former key multi-year resistance at $1800, and are attempting to create new long-term support at this critical level on a quarterly closing basis.  

Meanwhile, as we continue to see whipsaw action in the gold price this week, select gold stocks have begun to show signs of being sold out. With gold futures having closed above $1800 on a quarterly basis for three consecutive quarters, the recent trading action in quality juniors has begun to suggest a solid gold floor is being created where once was strong resistance.

In this space last week, I mentioned the miners getting some bids last Thursday as the gold price was seeing strong selling pressure below critical support at $1800. Buyers showed up quickly in the miners once the GDX traded down to its November low, while the higher risk GDXJ was unable to sell down to its recent low.

Furthermore, this week has seen many juniors begin to bifurcate higher from the sector, as silver continues to show relative strength to the gold price. Even though the social media-driven attempt to ramp the silver price higher quickly ran out of steam, the increased focus on rising inflation and the green transformation theme has the partially industrial metal remaining firmly above strong support at $26.

Select developer/explorer precious metal focused juniors, which I hold in my portfolio and cover in the Junior Miner Junky newsletter, have seen strong moves to the upside since last Thursday. Once a lengthy consolidation process is close reaching its end, quality juniors typically bottom independently once selling has dried up. 

Although not technically confirmed, the GDX may have printed a double bottom one week before the gold price nearly tested its November lows last week. And according to the many emails I have received since the failed gold breakout attempt during the first week of 2021, many junior speculators have sold out of this sector on expectations of a selloff below critical support levels. Increased skepticism of the gold bull market remaining intact is usually a good contrary indicator for a sustainable bottom being carved out in the mining complex.

In the past, after an up-leg became extreme overbought during the gold bull market in the 2000’s, a correction and consolidation of the move experienced a sustained rebound from 5 to 6 months after the peak. Considering select higher-risk juniors are showing relative strength to both gold and its miners recently, along with the silver price, this now 6-month correction in the precious metals complex may be ending soon when measured historically in both time and price.

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
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