Is a Secondary Breakdown Coming Up as Gold Prices Ease?

By Staff Writer / August 27, 2020 / Article Link

The recent bullish run of gold came to a brief stop at the close of markets on Monday, August 24th. Gold prices edged lower and continued to consolidate.  The correction comes ahead of US Presidential elections and amid improving US – China tensions.

Dropping to fresh daily lows, around the $1915 region in the first hour of Wednesdays trading session, analysts believe a secondary breakdown is becoming possible this week. Slipping below $1915 could trigger a bearish recognition day. A bearish recognition day is when traders acknowledge a breakdown in price and trigger a cascade of sell orders. Those that bought late into the rally are usually the first to sell.

In fact, major investors Warren Buffett are using the current opportune moment to purchase gold stocks in gold miners of interest. Berkshire Hathaway’s latest form 13F revealed, among a $564m purchase of close to 21m shares in gold stock Barrick Gold.

Junior gold miners have been a leveraged play on the gold price rally. This is due to their operational gearing. That is to say they have a big uplift to profits, thus giving owners of gold stocks higher dividends or special dividends when the price of gold is strong.

The volatility of Canadian junior gold miners has attracted both seasonal and first-time investors who have a higher risk tolerance. For instance, the VanEck Vectors Junior Gold Miners ETF, which tracks a basket of junior gold miners, gained 20% over the past three months. This is better than the performance of the VanEck Vectors Gold Miners ETF, which tracks a basket of medium and larger miners, and rallied approximately 11%. The SPDR Gold Shares fund was up 10% over the same period. None of the figures include dividends.

There have been several new deposits announced by Canadian junior miners this year, which have made a large difference to the value of gold stocks. As a general rule, new deposits have a larger effect on a junior miner’s balance sheet than a larger company. Smaller discoveries are much more likely to benefit junior mining stocks.

One phenomenal performance comes from Canadian junior Amex Exploration (TSX-V:AMX) whose gold stock is up a staggering 7,000% over the past 12 months. This comes after Amex hit very high-grade gold in three distinct zones including its iconic 100% owned Perron Gold Project located in the mining-friendly jurisdiction of Quebec.

Another Canadian junior gold miner who is well-positioned to weather the coronavirus pandemic Starr Peak Exploration (TSX:STE.V; OTCMKTS:STRPF). Starr Peak is gearing up for its first drilling campaign, and it has little exposure--yet. A good discovery could make outsized returns for investors who get in early--especially when they set up shop right next to a major discovery that eluded other major miners the first time around.