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Looking for the Miners to confirm gold breakout

Commentaries & Views

In a flight to safety, as continued signs of escalation in the Ukraine-Russia conflict and some less-than-stellar economic data ushered in risk-off sentiment, the gold price reached strong overhead resistance at $1900 on Thursday. With 100% certainty of the Federal Reserve monetary punchbowl about to be emptied, the scary geopolitical headlines, widespread inflation, and deteriorating economic data has gold prices on the cusp of a major upside breakout.

In last week’s missive, I noted the likelihood of a bullish breakout of the gold price from an 18-month bullish symmetrical triangle awaiting a strong catalyst to break in either direction soon. With investors recognizing the 13-year party on Wall Street might be coming to an end, along with the realization of cryptocurrencies not being a hedge against inflation, the addition of geopolitical tensions is fueling an upside breakout in the safe-haven metal.

As I type this column, the gold price is maintaining its recent gains to the $1900 region after Russia announced it is going to conduct nuclear drills Friday morning. But the major unknown to this geopolitical crisis is the uncertainty of how the U.S. and NATO will respond to any Russian incursion into Ukraine. With President Vladimir Putin previously notifying Russian citizens he would not invade Ukraine during the Olympic games in Beijing, the invasion could begin after this weekend.

Technically, if April Gold Futures close above $1900 on a weekly basis later today, the odds increase of the breakout continuing towards the $1920 level next week. Further out, we need to see a monthly close above $1900 for technical confirmation of a bullish breakout in gold.

Looking at the bigger picture, gold has created a significant 12-year cup and handle pattern, which would be completed once the $2100 level has been breached on a monthly closing basis. There are not too many examples of a multi-year cup and handle pattern in the major markets, and investors should understand how bullish this pattern can be when it occurs over a long period of time. The current cup and handle pattern in gold projects to a technically measured upside target of around $3,000.

Meanwhile, the miners have recently been de-coupling from equities as FAANG stock rotation into gold stocks has been coming down the miner food chain this week. Last week in this space I mentioned the two largest global miner sector bellwethers Newmont Gold Corp (NEM), and Barrick Gold (GOLD) have been bifurcating higher from the sector after making significant lows in December.

This week, we have seen the royalty/streaming sector catching strong bids, along with several more global miners joining the gold party. Royalty sector bellwether Royal Gold (RGLD) soared over 7.5% on Thursday, along with royalty space grand-daddy Franco Nevada (FNV) moving towards 52-week highs.

If the GDX can manage a weekly close above $35 later today with strong volume, the odds increase considerably that we have seen the bottom in the miners. Once we see a weekly close above $47 in the GDXJ with good volume as well, the odds increase substantially of a significant bottom being in place in the junior space.

I also expect quality higher-risk juniors to begin outperforming the mining space once this level has been breached.  We will also need to see continued de-coupling from more probable stock market weakness for investors to warm up to the higher-risk juniors that consume capital. I would expect to see increasing sector rotation coming down the food chain into the higher-risk juniors once the GDXJ closes above $47 on a weekly basis.

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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.