The fiery sale of junior gold stocks could end soon
Despite the highest inflation figures since 2008, as well as a market sell-off, gold is consolidating its outsized gains from last week. Buy stops were triggered once the gold price hit the high above the technical resistance wall at $ 1,800 an ounce and quickly moved to the next resistance area at $ 1,850 during the Comex session on Monday.
Then, after becoming technically overbought in the short term at the start of the week, the bullion came under pressure in response to higher than expected inflation data. On Wednesday, the US Consumer Price Index (CPI) data for April was well above expectations, with prices up 0.8% in March and 4.2% year-on-year.
These figures came just after China’s Producer Price Index (PPI) also posted a staggering 6.8% increase. That number has raised further concerns about the prices Western consumers will be charged for goods over the course of the year, ahead of an increase in manufacturing costs that will likely be passed on to consumers.
Bond yields rose following the announcement by investors that they had sold them in favor of the US dollar, and both of these factors held back any gains that precious metals could have made from the inflation announcement.
Then Thursday the we The PPI posted an increase of 0.6% in April, double the average estimate of economists. That number extends the gauge’s one-year rise to a whopping 6.2%. The core figure for the PPI, the index’s most volatile food and energy components, was also ahead of economists’ consensus, which was up 0.7% in April and 4.6% in year-over-year.
The prospect of higher inflation is pushing the market to speculate on a tightening of monetary policy ahead of the current Fed-mandated dot-plot, giving the US dollar a boost and triggering some support and filling the recent movement of gold from
disproportionate earnings of over $ 1,800.
With the price of gold falling after CPI data on Wednesday, then rising on PPI data the next day, markets continue to debate the extent of inflation risk, relative to the moment. where central banks will tighten fiscal policy in response to Federal Reserve insistence. is “transient”. But central banks are likely to continue to stick to this transitional stance for some time to come, when it will be a few months before any precise conclusions can be drawn.
The Federal Reserve needs “several months of data” to ensure that recent weak job growth and high inflation are temporary before considering changes to its ultra-relaxed monetary policy, the governor said on Thursday. from the Fed, Christopher Waller.
Regarding the job market, the Fed has said it will not change its $ 120 billion monthly bond purchases until there is “further substantial progress” in the remission. at work, with an increase in the current benchmark interest close to zero overnight. rate even further down the road.
The May and June non-farm payroll (NFP) reports “may reveal that April was an outlier, but we need to see that first before we start thinking about adjusting our political stance,” Waller said. “Now is the time for us to be patient, steel-eyed central bankers, and not be fooled by temporary data surprises.”
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 $ 7.8 trillion and it could grow in size to $ 10 trillion by the end of 2021. Given the persistence of disproportionate liquidity, the potential for gold prices to rise to long term remains.
Ultimately, the Fed is determined to support the economy by focusing on jobs and ignoring inflation, while we are in truly uncharted territory given the untested economic policies experienced by “central bankers in the United States. eyes of steel “. This is positive in the long run for the precious metals complex and detrimental to the US dollar.
At 1.7%, the yield on 10-year Treasury bills is now around 2.5% higher than that on 10-year Inflation-Protected Treasury Notes (TIPS), against a slightly higher spread. less than 2.0% at the end of last year. With inflation now rising much faster than interest rates, real rates have now fallen to about as much bullish level for gold prices as anything we’ve seen in recent years.
Amid very positive macroeconomic fundamentals, the price of gold is knocking on the door of its downtrend line from the all-time high of $ 2,089 reached in August 2020. Once we see a weekly close above $ 1850, which sits at the top of this descending channel. , a technical breakout could occur from a bullish 9-month wedge.
While many global miners and royalty companies have likely hit significant lows with the gold price falling since late March, the higher risk / higher reward junior space continues to present the best value for patient speculators. against the tide of resource actions.
While underground gold reserves held by large mining companies continue to be low and declining, new reserves become increasingly difficult to find as resources are depleted and exploration is expensive. Large mining companies have a few ways to address their shortages. They must either discover new underground resources through exploration, or acquire them through the buyout of junior development companies.
It is now cheaper for companies to buy developing or developed projects on Bay Street through an acquisition, rather than developing projects themselves due to the shortage of competent development teams and time pressures. while the price of gold consolidates its gains from 2020.
Newly cashed and well funded junior developers / explorers are reducing the risks of the world’s next mines. Quality juniors control the deposits that major and intermediate miners need to replace reserves and continue producing at their current levels. History shows that juniors who reduce the risk of a large deposit, which may be of interest to a large mining company or a financial partner, offer the best leverage to deal with rising metal prices.
The VanEck Vectors Junior Gold Miners ETF GDXJ fund holds a portfolio consisting mainly of mid-level and junior-level mining stocks of companies involved in gold exploration and production. Being a reliable barometer for the junior resource complex, this nearly $ 6 billion fund is closely watched by junior speculators and momentum traders.
The index broke a 7-year base above $ 45 in mid-2020 to achieve a 180% gain in just 4.8 months, then tested that breaking level during the 33% correction that followed at the end of March of this year as interest dried up. in the gold complex.
During the 8-month consolidation process to the March low, each successive low stopped more investors where there were no bears and only buyers. And since that low, volume on trending days has been mostly higher than volume on trending days, which is a sign of accumulation.
Once we see a weekly close above $ 1,850 in gold futures, I expect juniors to start leading miners higher. After testing its 7-year support line at $ 45, the GDXJ’s technical upside target is $ 90. Knowing that gold is in a bull market, patient speculators have had ample time to carefully build a concentrated portfolio of outstanding junior gold stocks before the start of the next upside.
However, time may be running out to accumulate a basket of junior developers controlling large projects whose risks are reduced at the stage of financing at these “clearance prices”. With the price of gold likely to have bottomed out in March, after a 20% correction from its all-time high of $ 2,089, global producers will begin to focus more on replacing depleting reserves.
The JMJ service manages a real money US $ 1 million portfolio and is fully transparent, which helps teach its members how to build and maintain a successful junior resource portfolio. Underwriters are given a carefully thought-out rationale for buying individual stocks, along with an equally calculated exit strategy. JMJ also teaches subscribers how to navigate the high risk junior resource equity industry by incorporating appropriate risk management tactics. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.
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