Gold Miners on the Verge of Breaking Out of a Multi-Year Base

TFT-admin | January 3, 2020

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David Erfle

(Kitco News) – Although the new year began with the continuation of the melt-up in U.S. equities, gold has also managed to remain rallying alongside record-high equity markets into 2020 on technical based buying. The safe-haven metal is rising towards multi-year resistance at $1550 on news of another U.S. airstrike in the Middle East. Iranian Major-General Qassem Soleimani, head of the elite Quds Force, and Iraqi militia commander Abu Mahdi al-Muhandis were killed late on Thursday in an air strike on their convoy in Baghdad airport, an Iraqi militia spokesman told Reuters.

Just like the earlier gold breakout took place during the “summer doldrums” of 2019, this recent move began during the winter holiday season when most precious metals’ analysts do not expect major moves to take place. Instead, those shorting the precious metals were forced to cover their positions, adding to the upward move higher into the beginning of 2020.

Moreover, gold has continued its relentless climb after President Trump stated earlier this week that the Phase One U.S./China trade deal will be signed on January 15th. Although there are still mixed messages from the media as to when the pact will actually be signed, sources say that Chinese top negotiator Liu He is expected to fly to Washington this week to sign Phase One. However, some other reports emerging from the Washington Post suggests there are still large holes in the deal, such as Chinese business subsides as being an issue for the U.S.

We can also factor into the probability of this gold move continuing upwards, with a whole host of very solid economic indicators pointing to a slowing global economy. Global car sales this year are expected to drop by 3.1 million, the biggest crash since 2008, and the International Energy Agency says 2019 growth in oil demand will be the lowest in three years. 

But the elephant in the Gold Room continues to be the barely reported crisis in the global credit refinancing, or “Repo” market. Into the end of 2019, the Repo crisis caused a massive increase in credit from the Federal Reserve to avoid the sort of stock market crash we saw in December 2018.

On Monday, the world’s largest central bank injected another $18.65 billion for a two-day repo operation and $30.8 billion in a one-day offering. And during just the first hour of business in 2020 yesterday, the Fed injected $57 billion into the Repo Market.

The Fed is desperately exchanging high-quality capital for cash to suppress market volatility and maintain the Fed’s overnight funds level, which is used as a benchmark for multiple other short-term interest rates within a range of 1.5%-1.75%. This is comparable to the credit surge at the New Year of 2000, that some say tripped the dot-com crash and started the secular gold bull market which began at the turn of the century.

As the new year unfolds, we should begin to see more generalist market investors keeping in mind the classic investment adviser approach to asset management being diversification. With U.S. stocks at a record in terms of their total market capitalization compared to gross domestic product and equity optimism at a 15-year high, there has never been a better time to diversify. Precious metals offer value in a world full of overpriced assets. Gold is still around 20% off its 2011 high and silver is worth nearly a third of the price it reached that year.

Meanwhile, the GDX ended 2019 just below the $30 region and once this critical long-term resistance level is broken on a weekly closing basis, there is not much technical resistance until the $40 area. The global miner ETF is poised to break out of a technically bullish cup & handle pattern, which has taken nearly four years to complete.

Although the GDX is short-term overbought and could experience a bit of profit taking next week, I expect the weakness to be bought soon after fund managers begin returning to their respective trading desks from the holidays.

In 2019, $31.8-billion worth of gold-mining deals were announced. This was the largest on record for the Canadian gold sector, according to data from Refinitiv. Moreover, the recent surge in M&A activity in the mining sector should add more local liquidity as those mergers close later this month and money is recirculated. We have also seen some big financing’s close among the quality developers and the earlier stage explorers recently, with several placements that had dragged for a couple of months finally closing. 

The popular junior miner exchange-traded funds continued to lead the mining sector during the last month of 2019, with GDXJ for gold and SILJ for silver being up by 11 and 18 per cent, respectively in December. The gold/silver ratio is moving in the right direction (lower), while silver juniors took the lead in the precious metals complex in October.

Major gold up-legs move up in several phases. Typically, in the first phase, gold outperforms silver as we witnessed last summer. In the next leg up, silver outperforms gold by two-to-three times and usually does so with a very volatile performance. With silver juniors leading the miners, while the miners continue to lead the metals, this is a very bullish combination coming into the new year.

When viewing the longer-term chart, the GDX is threatening to break out of a nearly 7-year long base and if broken to the upside soon, will give way to the next explosive up-leg in this new precious metal bull market. Once the largest and most closely followed gold miner ETF has a weekly close above long-term resistance at $30, the higher risk junior space should usher in increased speculation into this tiny sector.

Over the past few years, I have positioned Junior Miner Junky (JMJ) subscribers in the best in breed precious metal juniors well ahead of the summer surge higher in both gold and silver. The JMJ real money portfolio gained 35% in 2019, while being up 160% since its inception in 2016.