Despite the continued rise in long-term interest rates, the precious metals sector has continued to find takers since the end of September. Previously, rising bond yields acted as a selling point for gold and silver, without paying dividends or coupons. I think the main reason for the recent disconnect is that investors have viewed inflation differently since late September.

Endless supply chain issues, high energy prices and accelerating wage growth have amplified pro-inflationary factors. This trend shows no signs of slowing down any time soon and has investors questioning the world’s largest central bank’s “temporary” inflation argument.

Last week, the US Bureau of Labor Statistics released inflation figures for September, which show US consumer price inflation (CPI) accelerating from 5.4 % from a year ago – its biggest increase since July 2008.

Just like the United States, every economy in the world is experiencing a rapid rise in inflation. Canada’s CPI rose 4.4% year-on-year in September, according to a report released Wednesday by Statistics Canada. This is the fastest pace of growth since February 2003. Excluding gas, the CPI rose 3.5% year-on-year, while the monthly CPI has risen for the past nine consecutive months. Prices in all major sectors recorded gains, with transportation registering the most notable increase at 9.1%. Housing prices rose 4.8%, while food prices rose 3.9%. Basic living expenses, such as food, continue to rise.

Many leading economists say the actual numbers for global inflation are likely much higher than advertised, due to the obvious understatement of housing and food costs buried in recent index statistics. consumer prices.

As the price of gold continues to trade within a narrow $80 trading range over the past six weeks, with an upward bias, a major mean-reverting catch-up rally is in the works. unfold in the mining space mainly due to inflation fears.

The combination of miners’ underperformance against the price of gold and a strong US stock market since mid-June had given speculators in resource stocks little reason to hold positions below. -marines heading into the fourth quarter. Gold stocks began selling for tax loss in mid-June as nervousness over expectations of future monetary policy tightening grew.

Although tax-loss selling season is usually late in the year, with the small gold sector an underperforming ship in a sea of ​​outperforming ships in 2021, junior gold stocks have become hated in the point of being taxed early. – surrender fueled by loss. Many gold bag holders who chased juniors making 5x to 10x higher moves, in the space of less than 5 months in August 2020, started to capitulate at the start of H2/2021.

However, Fed tightening fears created the perfect storm for contrarian money patiently waiting to pounce on tax-loss sell deals in quality juniors heading into the fourth quarter. During this secular bull run in gold that began at the turn of the century, the precious metals sector is steadily swinging due to extreme greed as speculators are expected to cut profits; at extreme fear, when cashed contrarians should buy at low risk/reward entry points before the start of the next bullish leg.

Gold mining stocks have a strong history of outperforming gold prices both up and down. Gold futures hit an all-time high of $2,089 in early August 2020 and are down 15% from that level, trading at $1,781 per troy ounce on Thursday. Shares of GDXJ are down 33% over the same period, closing Thursday at $44.

Looking at a GDX 15-Year Monthly Chart, the VanEck Gold Miner ETF took 7 years to break a huge 7-year cumulative base above $31. After the move in 2020 became extreme overbought above $45, a healthy 14-month consolidation of a 4.8-month upside came down to test that breakout level last month.

At the end of the third quarter, GDX broke below $31 on a monthly basis, but this breakdown may have been a bear trap. Prices have since regained that critical support level and have the potential for a significant bottom if the global mining ETF can sustain $31 at the end of October. A sustained break above the 18-month moving average at $35.50 could signal the start of the next leg higher.

If the Fed gives us the “soft tap” as expected after the end of the next FOMC meeting on Nov. 3, I expect a “buy the news” reaction from the gold complex based on the overly reactive pullback due to the “taper-talk” that has taken place over the past four months. Between mid-June and late September, the VanEck Junior Miner ETF (GDXJ) fell more than 30% in anticipation of the Fed slowing down its colossal fourth campaign of QE money printing, while the price of the gold fell 10%.

Over the past few weeks, while most investors remain more focused on rising equity markets and cryptocurrencies, cashed contrarians have already fished the bottom of deeply oversold precious metals juniors. With both mining industry and the silver price continues to show relative strength in the price of gold over the past few weeks, one by one, junior quality gold and silver stocks have broken out 14 months bullish falling wedge graphic formations.

Although GDX and GDXJ have become short-term overbought on a daily basis, I expect weakness to continue to be bought quickly in quality juniors which became deeply oversold in the fourth quarter. As the mining complex begins to return to the price of gold, now is a great time to start moving into quality precious metal juniors on weakness before the next upside is confirmed in this gold secular bull market. If you need help doing this and would like to receive my research, weekly newsletter, portfolio, watchlist and trade alerts, please Click here for instant access.