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Cashed up junior gold stock fire sale in progress

Commentaries & Views

The 10-Year U.S. Treasury yield spiking above long-term resistance at 1.50% on Thursday for the first time in a year, forced gold prices back down to recent lows at $1,765. U.S. bond yields have tripled since August of 2020, which has been the main culprit in pressuring the gold price to correct 16% from its all-time high of $2089 since then.

The “flash spike” in 10-year Treasury yields on Thursday worried investors and caused the major U.S. indexes to reverse Wednesday’s large gains and fall into the red. The 10-year Treasury spiked to 1.6% unexpectedly before falling to 1.5%, marking its highest level since last February. The Nasdaq experienced a -3.52% decline in daily trading after losing over 470 points, which marks its lowest level since October 2020.

When testifying before congress earlier this week, Federal Reserve Chairman Jerome Powell shrugged off the surge in longer-term U.S. government bond yields as a sign of growing optimism about the economy, which could pick up steam as more people are vaccinated against the coronavirus.

Furthermore, Kansas City Fed President Esther George told farm executives in a virtual event on Thursday that “Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations.” This statement, adding to a chorus of similar remarks from other Fed officials in recent days, fueled the spike in bond yields.

Headlines about this event and what the world’s largest central bank intends to do about it, along with the ongoing saga of the proposed $1.9 trillion stimulus package, will be the driving force for the U.S. dollar and gold heading into the next FOMC meeting in mid-March.

The rapid rise in U.S. bond yields raises the prospects of the Federal Reserve needing to step into the bond market with yield curve control (YCC), which would be bullish for gold prices.

In the meantime, the Fed has pledged to continue buying $120 billion per month of U.S. Treasuries and mortgage-backed securities. Its balance sheet is currently at $7.6 trillion and the size could increase to $10 trillion by the end of next year. Given the outsized liquidity, the upside potential for gold prices in the long-term remains.

The bottom line is the Fed is all in to support the economy by focusing on employment and ignoring inflation. That is long-term positive for the precious metals complex and detrimental for the U.S. dollar. Amid very positive macro fundamentals, it is the technicals that are challenging gold in the short-term as we are in truly unchartered territory given the un-proven economic policies being experimented with by central banks.

Although the size and speed of the yield advance has kept downside pressure on the gold complex, silver has remained well bid during the recent reflation trade. Unlike gold, which is primarily used as a safe- haven and wealth protection asset by worried investors and central banks alike, silver’s industrial component has been rising with the copper price.

Moreover, the junior space has been showing relative strength to both the miners and gold for the past few weeks. The SILJ/GDX ratio has shown a steep rise in favor of silver juniors, while the GDXJ/GDX ratio has also been rising. After topping above $45 in early August of 2020, the GDX has been making lower lows towards strong support at the $31 region inside a bullish falling wedge, while the GDXJ has thus far held its November low.

Meanwhile, higher risk junior gold and silver developer/explorers have continued to raise capital at a frenzied pace during this now 7-month consolidation process in the gold price. The Oreninc Canadian Resource Financing Index increased in the trading week ending February 19th, 2021 to 93.72 from 89.45 a week ago as the number of financings increased while the gold price remained near recent lows.

While most quality juniors have already been “reflated” during this correction, investors losing patience and hitting the bid has created a buying opportunity for patient cashed up speculators waiting for lower risk entry points in their favorite cashed up gold stocks.

The gold bull is doing everything in its power to shake off as many riders as possible before climbing higher. As silver guru David Morgan has stated in the past, precious metal stocks will either scare you out, or wear you out.

After seven grueling months of trending lower, with a false breakout followed by a $150 downside reversal thrown in during the first week of 2021, we could either be forming a sustainable bottom, or see a “scare you out” move next month to the downside creating a “V” bottom.

As you are well aware, March of 2020 was very scary time for all of us when western governments went into lockdown mode to curtail the Covid-19 pandemic. While mining professionals nervously attended PDAC during the first week of March last year, junior developer/explorers which consume capital were being hit the hardest during the deflation scare.

A few weeks later, the sector created a “Miner Bear Trap for the Ages” after the central bank of the world’s reserve currency dived head first into the ocean of Modern Monetary Theory (MMT). The GDXJ zoomed over 180% in less than 5 months as trillions were pumped into the system via an alphabet soup of Special Purpose Vehicles (SPV’s).

Fast forward to a virtual PDAC next week, which comes as the mining sector has corrected 30% of those outsized gains since August of last year. But with gold threatening to sell off towards critical support at the $1690-$1700 region, it remains to be seen how the oversold mining sector will react if the bears are able to run the stops in gold futures next month before we begin the next up-leg of the gold bull.

Nevertheless, the best opportunities to accumulate quality juniors are when they are being sold by impatient speculators at the tail end of bull market corrections. 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.

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.