Make Kitco Your Homepage

Bombed out gold stocks showing relative strength to the metal

Commentaries & Views

Just when I thought I was out……they pulled me back in.

Al Pacino – The Godfather Part 3

In August 2020, the price of gold rose to new records, heading above $2000 per ounce. After zooming to an all-time high and becoming technically extreme overbought, the gold price has been consolidating last years outsized gains for the past 14 months while gold stocks were sold aggressively into the end of Q3/2021. Sentiment has become black bearish in the mining space, as most late-comers to last year's gold stock party gave up on their under-water positions  into the final trading session of Q3 last Thursday.

But just when the bear camp had become the most confident heading into the final trading session of Q3, the safe-haven metal whipsawed traders to rise 2% from support at the $1720 region and close back above the important $1750 level on a monthly, quarterly, and weekly basis last week. Being a participant in 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.

The timely reversal that took place last Thursday is also important technically, as this sudden move back above $1750 has the gold price remaining inside the bullish symmetrical consolidation triangle that has been forming over the past 14 months. And since the gold price climbed back above $1750, the weakness being created overseas this week has been bought during Comex sessions. Chinese markets had been on a week-long holiday until Thursday.

Also, Gold Futures may be forming the right shoulder of an inverted head-and-shoulder pattern as the recent downswing ended above the $1720 level. If the gold price were to rise above strong resistance at $1837 on this move, it would indicate an influx of buying power and potentially propel gold to new swing highs.

Since the gold price was unable to clear the $1900 level back in May, bullion has been in a trendless market after making a lower high in August, and a higher low in September with decreasing volume. Charles Dow tells us that a downtrend is a pattern of lower lows and lower highs. By breaking above $1837, gold would break this pattern and demonstrate that buyers are willing push the price to new swing highs.

Worsening supply chain disruptions and a raging energy crisis have joined forces recently to reawaken fears of a stagflationary blow to the global economy. This is good news for gold, which proved this week that there is strong buying interest when the price nears the important $1,750 an ounce level. Stagflation refers to a situation where growth slows down but inflation remains hot, a combination that hasn't emerged since the 1970's and took the gold price from roughly $110 in 1976 to $850 in January of 1980.

Moreover, improving sentiment and changing positioning in the Commitments of Traders (CoT) report look likely to provide short to medium-term support for gold. The latest CoT report from the CFTC shows short gold and silver positions are being cut.

The commercial CoT (bullion companies and banks) improved last week to 28% from 26%. The large speculators (hedge funds, managed futures, etc.) fell to 70% from 73%. Long open interest jumped almost 5,000 contracts and short open interest fell over 17,000 contracts, creating the most bullish gold CoT report in over a year.

As I pen this missive, gold prices are rising over $1780 as the Bureau of Labor Statistics said just 194,000 jobs were created last month. Economists were expecting to see Non-Farm Payroll (NFP) job gains of at least 490,000. This is the second consecutive month employment has missed expectations by a wide margin. The Federal Reserve's highest priority is to make sure millions of Americans now out of a job can get back to work. The NFP miss this morning has most likely taken the previously expected November FOMC announcement of a gradual taper of the Fed's $120 billion per month bond purchases off the table.

Meanwhile, the deeply oversold junior mining complex began to show relative strength to the gold price and the lower-risk miners after last Thursday's intra-day reversal surprise in gold. As mentioned in this column last week, the high-profile Agnico Eagle/Kirkland Lake Gold merger announcement on September 28th has caught the attention of generalist investors who are beginning to recognize the undervaluation of gold stocks. With overvalued tech stocks coming under pressure recently, I expect retail investors have begun rotating historically overpriced tech stock profits into historically underpriced mining shares.

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 cashed-up contrarians should be buying at lower-risk/reward entry points before the next up-leg begins.

The recent move lower in the precious metals sector since a June peak has gold equities presenting one of the best value propositions seen in quite some time, at a time of both historic global debt-to-GDP imbalances and record central bank money printing.

With the mining complex at historic lows in relation to over-priced equities, this is a great time to begin scaling into quality precious metals juniors before the next up-leg is confirmed in this secular gold bull market. If you require assistance in doing so, and would like to receive my research, weekly 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.