The risk has now shifted to the upside in gold stocks
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Earlier this morning in a speech to the Jackson Hole economic symposium, Fed Chairman Jerome Powell signaled the U.S. central bank will remain patient and repeated that he wants to avoid chasing "transitory" inflation that would potentially discourage job growth in the process.
Although Powell signaled to the markets that the Fed is likely to initiate the tapering of its bond purchase program sometime in 2021, it also appears that the Fed Chair wants inflation so he will be able to eventually raise rates when inflation and growth are accelerating at a greater pace.
The news that the Fed punch bowl (QE) would not be taken away any time soon sent benchmark U.S. Treasury yields and the U.S. dollar lower, while pushing equities to all-time highs. The lack of tapering news also cleared the path higher for gold, and as bullion broke above $1,800 and its 200-day moving average, the safe-haven metal is eying the next strong resistance level around $1,835 going into the monthly close next Tuesday.
Before the much-anticipated Jackson Hole speech by the world's most powerful central banker, gold prices have been trending lower since June as talk of a "taper tantrum" had investors thinking that the U.S. Federal Reserve's bond-buying program could be scaled back.
Meanwhile, the relative weakness of both the miners and silver heading into this week were giving signals of more downside in the precious metals complex. Once the GDXJ closed below critical support at $41 last week, along with the HUI Gold Bugs Index losing long-term critical support at 250, the sector was primed for this year-long selloff in the sector coming to a panic-selling conclusion soon.
However, with the mining complex extreme oversold heading into this week, a bullish reversal is in the process of taking place as both GDXJ and the HUI are primed to close back above their respective critical support levels later today on a weekly basis. Being a participant is this highly volatile sector for nearly two decades, false moves lower to shake out as many long-term bulls as possible before the next up-leg begins have been commonplace.
During this secular gold bull that began at the turn of the century, the precious metals sector routinely pendulum swings from extreme greed, when speculators should be trimming profits; to extreme fear, when contrarians should be buying at lower-risk/reward entry points before the next up-leg begins.
From its bear-trap low of $19 last March, the GDXJ zoomed 180% higher in just 4.8 months into August of 2020, which is a huge move that needed to be digested by the market. After an out-sized gain in such a short period of time peaked last August at $65, the junior miner ETF has now corrected roughly 40% in more than twice the amount of time it took the up-leg to peak.
This torturous decline, while most every other sector has been rising, has seen junior investors selling for tax-loss earlier than usual, while the sector has become truly hated by most investors once again.
Although the year-long selloff in the gold complex has been a frustrating affair for participants, capitulation selloffs are what cashed-up, seasoned junior resource stock speculators dream of, as one investor's tax-loss trash, becomes another long-term investor's treasure. With many of the quality junior babies being thrown out with the life-style junior bathwater, opportunity is knocking on the cashed-up, contrarians' door.
With the both the miners and silver beginning to show relative strength to the gold price during a bullish reversal this week, I expect the path of least resistance is now to the upside in mining complex. Once big money resource stock traders and fund managers return to their trading desks after the U.S. Labor Day holiday, I expect them to be scaling into beaten down quality juniors that are cashed-up into 2023.
For the past few weeks, Junior Miner Junky (JMJ) subscribers have been kept up to date with suggested "stink-bid" price points on each junior owned and covered in the subscription-only weekly newsletter. I have also added to core positions to the JMJ real money portfolio since mid-August, while scaling into a few new positions.
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