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Fed actions set up double bottom scenarios in several miner ETF’s

Commentaries & Views

Since Gold Futures peaked at an all-time high of $2089 in August of 2020, the safe-haven metal has endured an extended and healthy correction of outsized gains. After bullion had doubled in price to $2089 per ounce last August, from its low of $1045 in late 2015, this necessary correction has been taking place for the past seventeen months.

In August of this year, Gold Futures hit a spike low at $1675 during a thin holiday trading in the Asian markets, which is the 38.2% Fibonacci retracement level of the four-year doubling of the gold price that marked a 20% correction from the high at $2089. This was the third such spike low at this critical level that produced a sharp intraday bounce created by eager dip buyers each time.

But after two consecutive years of stellar returns in the gold complex, 2021 has been a frustrating experience to say the least for investors attempting to trade this sector. The extended gold correction of previous outsized gains has been fraught with several bull traps, along with more than a few bear traps, but has remained inside of a bullish symmetrical triangle consolidation pattern.

As a result, investor apathy has entered into the mining space with trade volume decreasing, while many investors on both sides continue to be whipsawed out of bullion positions. And although the gold price has recently remained in an uptrend marked with higher lows and higher highs since the third test of the $1675 low in August, the mining sector has mostly shown relative weakness along with the silver price.

Meanwhile, the precious metals junior space has been sold with much more enthusiasm during an especially brutal Tax-Loss Silly Season in 2021. With investors showing losses in most of their mining stock investments this year, individuals have been ignoring deeply depressed junior stock values and discarding securities in order to exchange their current losses for tax savings.

Furthermore, while equities continue to trade near all-time highs, there has been little to no interest from the generalist investment community to buy these undervalued mining securities being sold by ill-timed resource stock speculators. The lack of retail interest, along with tax-related sale decisions, has created a toxic cocktail that has resulted in capitulation selling in the mining space despite the gold price showing a bullish bias since the August low and remaining near the key $1800 per ounce region.

But the good news is that the bulk of tax-loss selling in the mining sector likely reached a climax on Wednesday afternoon. Although one day's trading action does not constitute a trend, some sector rotation out of wildly over-priced tech stocks may have also begun to find a home in massively undervalued gold stocks the following day. As I type this column, the Nasdaq has sharply reversed Wednesday's move higher and sliced below its 50-day moving average, while the GDX closed up 5% on Thursday with strong volume.

The whipsaw moves that took place on Wednesday were caused by the market reactions to the highly anticipated FOMC policy meeting. Initially, gold prices were sold down quickly to nearly test strong support at $1750 once the Federal Reserve announced that it would be buying $60 billion of bonds a month starting in January.

The Fed tapered its $120 billion per month QE program by $15 billion a month in November, doubled that in December, and will accelerate the reduction further come 2022. Even though the accelerated taper news was telegraphed by the Fed and mostly priced in, the statement also included a more hawkish new "dot plot" which lays out the central bank's updated monetary policy through 2024.

The previous dot plot anticipated that there would only be one interest rate hike in 2022. Currently, the Fed is anticipating raising rates three times in 2022, three times in 2023, and two more times in 2024. Each interest rate hike will be ¼ percent or 25 basis points. This is a much more aggressive timeline for rate hikes than previously expected and the result may have significant implications for the broader market and a bearish setup for stocks.

But the gold price whipsawed bears during the subsequent press conference when Fed Chair Jerome Powell clarified that the risk of persistently higher inflation is now uncomfortably high. The key statement to the press that began to push the gold price higher, was when Powell acknowledged the possibility that inflation will not decline as expected next year, when he said - “There's a real risk now, that inflation may be more persistent and that may be putting inflation expectations under pressure, and that the risk of higher inflation becoming entrenched has increased. I think part of the reason behind our move today is to put ourselves in the position to be able to deal with that risk.”

Just as we saw after the first taper announcement by the Fed in September, the hawkish actions by the world's largest central bank were met with a “sell the rumor, buy the news” scenario in the gold space. Historically, once the Fed finally pulls the trigger to begin a rate-hike cycle, the decision has marked a major bottom in the gold complex.

During the lead-in to a telegraphed rate-hike cycle by the Fed in late 2015, mining stocks began to bottom six months prior to the announced hike in mid-December. And once the rate-hike cycle began, the mining sector shot up 140% in just six months from a similarly depressed level as it is currently. The Fed is now expected to wrap up its tapering program by late winter or early spring, and the CME FedWatch Tool is currently pricing in a 42% chance of the first rate hike cycle in six years to begin in March.

As the selling in both the miners and silver increased into the FOMC statement on Wednesday, sharp upside reversals took place in many key precious metal's indices during the subsequent press conference. The move higher reversed from the same late September levels reached in several closely followed miner ETF's (GDX, GDXJ, SIL, SILJ), along with the Silver Futures price at exactly $21.41. And after a follow though surge higher saw bears rushing to cover gold short positions on Thursday, the precious metals mining complex appears to be in the process of forming a significant double bottom with more follow though buying into the weekend.

By the close of today's trading session, most big money traders and fund managers will have likely completed year-end book squaring before leaving their respective trading desks to go on holiday and not return until the first week of 2022. With the bulk of tax-loss selling completed, patient mining sector professionals have begun to scoop up extreme oversold quality juniors trading at deep discounts.

In the case of junior valuations, the current 17-month consolidation has resulted from a 180% move higher in the GDXJ, which took just 4.8 months to complete. After rising this high in such a short period of time, the junior miner ETF has corrected 43% from its August 2020 peak. And more importantly, the last time the GDXJ traded at these levels consistently, gold was priced at $1550 in August of 2019.

Although the recent selloff in the gold complex has been a frustrating affair for participants, tax-loss selling climaxes 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 stocks trading at bargain basement prices, opportunity is knocking on the cashed-up, contrarians' door.

After an especially brutal tax loss selling episode induced capitulation selling in the mining space into Fed-speak on Wednesday, this latest Fed meeting may have been the catalyst gold and precious metal mining investors have been waiting for.

The Junior Miner Junky service provides complete transparency into my trading activities and teaches investors how to navigate this high-risk/high-reward sector. Subscribers are provided a carefully thought-out rationale for buying individual stocks, as well as an equally calculated exit strategy. If you require assistance in accumulating a basket of quality juniors with 5x-10x long-term upside potential, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.

This will be my last column in 2021. I wish all of my readers a safe and joyous holiday season and a very Happy New Year, hopefully spent with family and friends. See you next year!

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.