Contributed Commentaries
Junior Gold Stock Trains are Leaving the Station
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Last week was pivotal for the precious metal’s complex, with the gold price breaking through key resistance at $1840. Inside of a run that saw the safe-haven metal move higher on seven consecutive trading sessions, it was last Wednesday’s price action that finally broke this level, closing the session on a strong move higher with excellent volume.
After passing the $1,840, which was also downtrend line resistance from its $2089 all-time high reached in August of 2020, bullion has gained upward momentum. Gold futures continued to escalate due to hotter-than-predicted U.S. inflation data and despite the U.S dollar surging, which typically moves inversely to the safe-haven metal.
More importantly, with Gold Futures closing sharply above the critical resistance level of $1,840 per ounce on a weekly basis, this price now becomes a solid platform of support in the move higher. With the metal entering a seasonally strong period, which runs from November through February, more upside is expected with sharply rising inflation continuing to focus the minds of global central banks.
It is becoming clear to the marketplace that rising inflation will be more persistent, and not just a transitory phenomenon. Rising prices have been driven mainly by a demand shock rather than a supply shock, and are likely to escalate as wage increases get baked into the economic cake.
The U.S. 6.2% year-over-year surge in consumer prices marked the fifth straight month that the consumer-price index exceeded 5%, and signaled the largest jump in consumer price inflation since July 1982. Furthermore, inflation is running much hotter for essential consumer goods than suggested by official CPI numbers, which do not factor in food and energy costs.
As mentioned in this column last week, the marketplace has awakened to the fact that the Federal Reserve finds itself trapped. The central bank, both in terms of policy and in terms of political pressure, is expected to do something about continued rising inflation that is running at an annualized rate of over 11%. But the Fed is not in a position to allow long-term real rates to rise uncontrollably, nor does history show that this will occur following a debt binge.
The central bank’s Catch-22 is on the one hand being asked to bring inflation under control, which means tightening monetary policy. And on the other hand, the world’s largest central bank is expected to subsidize government spending, which means easing monetary policy.
The gold price has been unable to clear the $1900 level on a monthly closing basis since mid-2020. With Gold Futures in the process consolidating the recent move higher, a monthly close above this level would likely be the final nail in the bearish gold coffin. And a possible catalyst for the safe-haven metal to challenge the $1900 region may be coming as soon as next week.
U.S. President Joe Biden will likely decide on who he will nominate to head the Federal Reserve before Thanksgiving, a White House spokesperson said on Wednesday. This is a critical choice for the first-term Democrat and one that could well have a bearing on how his economic agenda plays out. Current Chair Jerome Powell’s term is set to expire in February, and there are mixed views on whether he will be reappointed.
Last week, Biden interviewed Powell and Fed Governor Lael Brainard, who is the only Democrat on the current seven-member Fed Board of Governors. Progressive Democrats have been pushing for Brainard, who was named to the board by former President Barack Obama and is seen as more dovish on monetary policy while being stronger on bank regulation.
A Brainard nomination likely would indicate to markets that the monetary punch bowl will not be taken away any time soon. But ultimately, no matter who is selected, the Fed will remain under enormous pressure to print more money and let inflation solve the federal government’s funding problems.
The recent sharp move higher in the gold price is causing a degree of profit-taking with the precious metal now consolidating a $120 up-move after becoming short-term overbought. With some near-term profit-taking notwithstanding, the outlook for both gold and silver over the remainder of 2021 and into next year remains bullish.
Meanwhile, with tax-loss selling of underperforming junior precious metal’s stocks beginning in mid-June, much of this selling appears to have ended early as well. Over the past several weeks, many of the quality issues in the junior mining space have been outperforming the sector.
Although tax-loss selling season generally takes place during the tail end of the year, with the tiny gold sector being an under-performing boat in a sea of out-performing ships in 2021, junior gold stocks became hated to the point of early tax-loss fueled capitulation.
The combination of the miners underperforming the gold price and an elevated U.S. equity market gave resource stock speculators little reason to hold under-water positions heading into Q4. Gold stocks began to be sold for tax-loss in mid-June, as nervousness regarding the expectation of future tightening of monetary policy increased.
Many gold stock bag-holders who chased juniors making 5x to 10x moves higher, in the space of less than 5 months into August of 2020, began to capitulate positions at the start of H2/2021. The extreme sell-off over the following 15-months has become the perfect storm for patient contrarian money waiting to pounce on tax-loss selling deals in quality juniors earlier than usual this year.
Once the Fed announced the "soft taper" after the FOMC meeting concluded on November 3rd, a "buy the news" reaction took place in the gold complex based on an over-reactive pullback due to "taper-talk" keeping pressure on the gold space.
I have been prepping Junior Miner Junky subscribers since the beginning of Q4 that once the GDXJ makes a weekly close above $47, the higher-risk, non-cash flowing juniors would begin to outperform the mining sector.
After both the GDX and GDXJ broke out of inverted head & shoulder bottom formations last week, many higher-risk juniors have begun to outperform the miners, while others have yet to react to the move higher in the sector. When the precious metal’s sector creates a significant bottom during tax-loss silly season, each individual bombed-out junior low depends mostly on when the last seller of size capitulates.
Many junior quality gold stocks have been popping higher from 15-month bullish falling wedge patterns since the beginning of Q4. The junior miner ETF closed well above $47 last week, which is a level that has been acting as support this week. With the sector short-term overbought, this is a good time to buy long-term holdings in quality juniors on weakness.
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