Fire sale of junior gold shares cashed in progress
The 10-year US Treasury yield climbed above long-term resistance at 1.50% on Thursday for the first time in a year, forcing gold prices back to their recent lows at 1 $ 765. U.S. bond yields have tripled since August 2020, which has been the main culprit in pushing the price of gold to correct 16% from its all-time high of $ 2,089 since then.
The “flash spike” in 10-year Treasury yields on Thursday worried investors and caused major US indices to reverse Wednesday’s large gains and fell into the red. The 10-year Treasury surged to 1.6% unexpectedly before falling to 1.5%, marking its highest level since last February. The Nasdaq saw a -3.52% drop in daily trading after losing more than 470 points, which marks its lowest level since October 2020.
During his testimony to Congress earlier this week, Federal Reserve Chairman Jerome Powell ignored the surge in longer-term U.S. government bond yields, a sign of growing optimism about the economy, which could accelerate as more people are vaccinated against the coronavirus.
Additionally, Kansas City Fed President Esther George told farm leaders at a virtual event on Thursday that “much of that increase likely reflects growing optimism about the strength of the recovery and could be seen as an encouraging sign of rising expectations for growth “. That statement, on top of a chorus of similar remarks from other Fed officials in recent days, has fueled the surge in bond yields.
Headlines about this event and what the world’s largest central bank intends to do about it, along with the ongoing saga of the proposed $ 1.9 trillion stimulus package, will be the driving force behind the US dollar and gold before the next FOMC meeting in mid-March.
The rapid rise in US bond yields increases the chances that the Federal Reserve will need to enter the bond market with yield curve control (YCC), which would be bullish for gold prices.
In the meantime, the Fed has pledged to continue buying $ 120 billion per month in US Treasuries and mortgage-backed securities. Its balance sheet is currently $ 7.6 trillion and its size could grow to $ 10 trillion by the end of next year. Given the disproportionate liquidity, the potential for long-term gold price increases remains.
The bottom line is that the Fed is all about supporting the economy by focusing on jobs and ignoring inflation. This is positive in the long run for the precious metals complex and detrimental to the US dollar. Amid very positive macroeconomic fundamentals, it is the technicalities that challenge gold in the short term as we are in truly uncharted territory given the untested economic policies experienced by central banks.
While the magnitude and speed of the rise in yields kept downward pressure on the gold complex, silver remained a strong buy during the recent reflation trade. Unlike gold, which is primarily used as a safe haven and as a wealth protection asset by worried investors and central banks, the industrial component of silver has increased with the price of copper.
Additionally, the junior space has shown relative strength for both miners and gold over the past few weeks. The SILJ / GDX ratio showed a strong increase in favor of the silver juniors, while the GDXJ / GDX ratio also increased. After breaking above $ 45 in early August 2020, the GDX has hit lower lows to solid support in the $ 31 region inside a bullish bearish wedge, while the GDXJ has so far maintained its lowest in November.
Meanwhile, the younger, higher risk gold and silver developers / explorers continued to raise capital at a breakneck pace during this 7 month gold price consolidation process. The Oreninc Canadian Resource Financing Index rose during the trading week ending February 19, 2021 to 93.72, from 89.45 a week ago, as the number of financings increased while the price of l gold remained near recent lows.
While most quality juniors have already been ‘pumped up’ during this correction, investors losing patience and hitting the offer have created a buying opportunity for patient cashed speculators awaiting lower risk entry points. in their preferred cashed gold stocks.
The golden bull does everything to shake off as many riders as possible before climbing higher. As money guru David Morgan has stated in the past, precious metal stocks will either scare you or exhaust you.
After seven grueling months of downtrend, with a false breakout followed by a downward reversal of $ 150 in the first week of 2021, we could either form a lasting bottom or see a move to scare you. The next month on the decline create a bottom in “V”.
As you well know, March 2020 was a very scary time for all of us when Western governments went into lockdown mode to reduce the Covid-19 pandemic. While mining professionals nervously attended the PDAC during the first week of March last year, capital-consuming junior developers / explorers were hit hardest during the deflation crisis.
Weeks later, the industry created a “Miners Bear Trap for the Ages” after the world’s reserve currency central bank plunged head-first into the ocean of modern monetary theory (MMT). The GDXJ zoomed over 180% in less than 5 months as billions of billions were pumped into the system via an alphabet soup of Special Purpose Vehicles (SPVs).
Fast forward to a virtual PDAC next week, which comes as the mining sector corrected 30% of those outsized gains since August of last year. But with gold threatening to sell off towards critical support in the $ 1,690- $ 1,700 region, it remains to be seen how the oversold mining sector will react if the bears are able to execute the stops on the futures contracts on the market. ‘gold next month before starting the next hike. golden bull’s leg.
Nonetheless, the best opportunities to accumulate quality juniors are when they are sold by eager speculators at the end of the bullish market corrections. With hundreds of millions of dollars paid to junior explorers and developers since the start of the Covid-19 crisis, many fully funded exploration and development programs are now underway.
Now is a good time for resource stock speculators to take advantage of the current weakness and perform proper due diligence on a carefully selected watchlist of quality juniors. If you need help doing that and would like to receive my research, newsletter, portfolio, watchlist, and trade alerts, please click here for instant access.
Disclaimer: The opinions 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 the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. This is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage resulting from the use of this publication.