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Junior capitulation begins while deal flow remains strong

Commentaries & Views

With the gold price enduring above key support at $1800 per ounce for the past two weeks, resource stock speculators began to capitulate on select juniors late last Friday. Although Comex Gold Futures closed well above $1800 at 1:30pm PST, relative junior gold stock weakness increased into the close of the stock market as indiscriminate selling began to take place in the junior sector.

Moreover, the GDXJ junior miner ETF closed at a 52-week low just below $45 weekly support last Friday, despite the GDX being down marginally on the week and remaining well above its March lows. In the face of the gold price maintaining key support above $1800, the GDX has not been able to close above strong resistance at $35, while many juniors continue to show even more relative weakness with strength being sold into since the June reversal in the complex.

Although strong selling in precious metal's stocks increased to begin this week, the gold price has stubbornly held the $1800 level, as junior speculators are throwing in the towel after a year-long downtrend in the gold complex. With stock market strength remaining resilient, it appears as though junior gold stock tax-loss selling has come early with "fishing lines" showing up in many charts towards long-term support levels.

Resource stock speculators continuing to see snap-back rallies in the stock market after equities appear to be rolling over, which has them growing weary of holding juniors that have underperformed a down-trending gold price in a "risk-on" environment. Therefore, they have been selling losing positions in down-trending higher-risk juniors to rotate the proceeds into up-trending sectors.

However, as "Summer Doldrums" selling continues in the junior space with price/volume action showing the bloodletting having little to do with fundamentals, the sector deal-flow has remained robust. While investors are giving up on the sector this week, two junior gold developers announced their respective mining projects have received significant financing deals, with another announcing a major miner making a strategic investment.

On Tuesday, Marathon Gold (MOZ.TO) announced the signing of a non-binding, exclusive display term sheet with Sprott Resource Lending Corp. for a US$185M senior secured project Credit Facility, which will be used to fund the construction of its 100%-owned Valentine Gold Project in the central region of Newfoundland and Labrador, Canada.

A March 2021 positive Feasibility Study outlined an open pit mining and conventional milling operation over a 13-year mine-life. Once built, the Valentine Gold Mine will be the largest in Atlantic Canada. The company has stated detailed engineering, staffing and procurement for the project is already underway. Subject to receipt of approvals, construction is scheduled to commence in early 2022.

Due in large part to Marathon's success at the Valentine Gold Project, a claim staking rush has been taking place by numerous junior exploration companies in the large southwest to northeast-trending region known as the Central Newfoundland Gold Belt (CNGB). The CNGB stretches almost across the entire island of Newfoundland, which is only just under 250 km in length.

Then on the following day, Rio2 Limited (RIO.V) announced that it too has arranged mine construction financing totaling approximately US$125 to US$135M to finance the construction of its 100%-owned Fenix Gold Project in Chile. The Mine Financing Package will allow for Rio2 to commence pre-construction activities at the Fenix Gold Project, prior to receiving Environmental Impact Assessment ("EIA") approval and permits for its planned 20,000 tonnes per day, run of mine, heap leach operations.

Since the outset, the primary focus of Rio2 has been to accelerate the Fenix Gold Project to production and this Mine Financing Package will allow the company to maintain its current schedule for first gold production in Q4/22. The mine will produce an average of 93,000 oz/au per year in the first 13 years, followed by 50,000 oz/yr during the final years of production.

Finally, on Thursday, mid-tier gold miner Eldorado Gold (EGO) acquired an 11.5% shareholding in Probe Metals (PRB.V), an explorer with high-grade projects in Quebec. Probe owns several gold properties relatively close to Eldorado's Lamaque gold mine, including the nearly 4M oz/au Val-d'Or East project. The 3.98M au/oz project is critical mass, and likely will be the basis for a future minable resource well above 2.5Moz, which could support production beyond 150k oz/yr for more than 10 years.

The acquisition of 15.04 million common shares of Probe at C$1.575 each follows Eldorado's friendly takeover of QMX Gold Corp, another junior with assets in Quebec's resource-rich Abitibi Greenstone Belt, earlier this year. Major gold miner Newmont also owns 11% in Probe.

Meanwhile, the GDXJ is attempting to print a double bottom at the $43 level ahead of the next Federal Reserve monetary policy meeting on July 27-28. The meeting will be especially important for the markets, with Fed Chair Jerome Powell saying during testimony last week on Capitol Hill that FOMC members will be discussing "substantial progress" made and the possibility of reducing its $120 billion a month asset purchases.

"We'll discuss reducing asset purchases on substantial progress measured from last December. We'll be making that assessment during the next FOMC meeting," Powell said.

For the past few weeks, the gold price has been consolidating in a tight $35 range between its 100-day moving average near $1790 on the downside and its 200-day moving average around $1825 on the upside, waiting for a Fed-speak catalyst to break out of this range in either direction. Technically, there is stronger resistance in the gold price at $1850, with stronger support at the $1750 level.

Although it remains to be seen if Powell will mention a September-October tapering of QE during the upcoming FOMC meeting speech, the gold price may have already priced in bond purchase reduction as Fed officials have been jawboning about tapering QE earlier than previously expected for the past six weeks.

Moreover, the marketplace has become volatile leading up to this event, with the spread of the Delta variant having shifted expectations to early next year for the first reductions in Fed asset purchases. If the Fed supports this view in its policy statement next week, then it could mark the turning point for gold and the double bottom forming in GDXJ at $43 may hold.

On the downside, there is long-term support at $41 if the gold continues lower towards $1750 support. With computer algorithm-based trades being set to key words and phrases coming from the world's most powerful central banker next Wednesday, I expect to see the precious metals complex make a strong move in either direction.

Meanwhile, the Relative Strength Index (RSI) on the weekly GDXJ/GLD ratio is getting closer to the extreme level reached on the downside at the March 2020 spike low in the sector, setting up an imminent bottom.

As the junior miner ETF continues to drift lower, many cashed-up, quality juniors are selling off with low volume, showing a lack of interest in higher-risk juniors with most big-money traders and fund managers on summer vacation for the first time in two years.

While experiencing extended consolidations, the miners have made significant bottoms during the late July/early August time-frame in the past. With the market signaling investors believe the inflation burst in 2021 is transitory, the stock market keeps rising while many speculators giving up on gold stocks has created opportunity for contrarian investors with cash and patience.

This is a good time for resource stock speculators to take advantage of the current weakness and place "stink bids" 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.

Full Disclosure: I have purchased shares in MOZ.TO, RIO.V, and PRB.V last year in the open market at much lower prices , after recommending all three juniors to Junior Miner Junky subscribers. Please do your own due diligence before considering the purchase of any junior resource stock.

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.