Junior Gold Stock Trains are Leaving the Station
Last weekwas pivotal for the precious metal's complex, with the gold price breakingthrough key resistance at $1840. Inside of a run that saw the safe-haven metalmove higher on seven consecutive trading sessions, it was last Wednesday'sprice action that finally broke this level, closing the session on a strongmove higher with excellent volume.
Afterpassing the $1,840, which was also downtrend line resistance from its $2089all-time high reached in August of 2020, bullion has gained upward momentum.Gold futures continued to escalate due to hotter-than-predicted U.S. inflationdata and despite the U.S dollar surging, which typically moves inversely to thesafe-haven metal.
Moreimportantly, with Gold Futures closing sharply above the critical resistancelevel of $1,840 per ounce on a weekly basis, this price now becomes a solidplatform of support in the move higher. With the metal entering a seasonallystrong period, which runs from November through February, more upside isexpected with sharply rising inflation continuing to focus the minds of globalcentral banks.
It isbecoming clear to the marketplace that rising inflation will be morepersistent, and not just a transitory phenomenon. Rising prices have been drivenmainly by a demand shock rather than a supply shock, and are likely to escalateas wage increases get baked into the economic cake.
The U.S.6.2% year-over-year surge in consumer prices marked the fifthstraight month that the consumer-price index exceeded 5%, and signaled the largestjump in consumer price inflation since July 1982. Furthermore, inflation isrunning much hotter for essential consumer goods than suggested by official CPInumbers, which do not factor in food and energy costs.
As mentioned in this column last week, the marketplace has awakened to thefact that the Federal Reserve finds itself trapped. The central bank, bothin terms of policy and in terms of political pressure, is expected to dosomething about continued rising inflation that is running at an annualizedrate of over 11%. But the Fed is not in a position to allowlong-term real rates to rise uncontrollably, nor does history show that thiswill occur following a debt binge.
The centralbank's Catch-22 is on the one hand being asked tobring inflation under control, which means tightening monetary policy. And onthe other hand, the world's largest central bank is expected to subsidizegovernment spending, which means easing monetary policy.
The goldprice has been unable to clear the $1900 level on a monthly closing basis sincemid-2020. With Gold Futures in the process consolidating the recent movehigher, a monthly close above this level would likely be the final nail in thebearish gold coffin. And a possible catalyst for the safe-haven metal tochallenge the $1900 region may be coming as soon as next week.
U.S. PresidentJoe Biden will likely decide on who he will nominate to head theFederal Reserve before Thanksgiving, a White House spokesperson said on Wednesday. This is acritical choice for the first-term Democrat and one that could well have abearing on how his economic agenda plays out. Current Chair Jerome Powell'sterm is set to expire in February, and there are mixed views on whether he willbe reappointed.
Last week, Bideninterviewed Powell and Fed Governor Lael Brainard, who is the only Democrat onthe current seven-member Fed Board of Governors. Progressive Democrats havebeen pushing for Brainard, who was named to the board by former PresidentBarack Obama and is seen as more dovish on monetary policy while being strongeron bank regulation.
A Brainardnomination likely would indicate to markets that the monetary punch bowl willnot be taken away any time soon. But ultimately, no matter who is selected, theFed will remain under enormous pressure to print more money and let inflationsolve the federal government's funding problems.
The recent sharpmove higher in the gold price is causing a degree of profit-taking with theprecious metal now consolidating a $120 up-move after becoming short-termoverbought. With some near-term profit-taking notwithstanding, the outlook forboth gold and silver over the remainder of 2021 and into next year remainsbullish.
Meanwhile, withtax-loss selling of underperforming junior precious metal's stocks beginning inmid-June, much of this selling appears to have ended early as well. Over thepast several weeks, many of the quality issues in the junior mining space havebeen outperforming the sector.
Althoughtax-loss selling season generally takes place during the tail end of the year, withthe tiny gold sector being an under-performing boat in a sea of out-performingships in 2021, junior gold stocks became hated to the point of early tax-lossfueled capitulation.
Thecombination of the miners underperforming the gold price and an elevated U.S.equity market gave resource stock speculators little reason to hold under-waterpositions headinginto Q4. Gold stocks began to be sold for tax-loss in mid-June, as nervousnessregarding the expectation of future tightening of monetary policy increased.
Many gold stock bag-holders who chasedjuniors making 5x to10x moves higher, in the space of less than 5 months into August of 2020, began to capitulate positions at the start ofH2/2021. The extreme sell-off over the following 15-months has become the perfect storm for patient contrarianmoney waitingto pounce on tax-loss selling deals in quality juniors earlier than usual thisyear.
Once the Fedannounced the "soft taper" after the FOMC meeting concluded onNovember 3rd, a "buy the news" reaction took place in thegold complex based on an over-reactive pullback due to "taper-talk" keepingpressure on the gold space.
I have beenprepping Junior Miner Junky subscribers since the beginning of Q4 that oncethe GDXJ makes a weekly close above $47, the higher-risk, non-cash flowingjuniors would begin to outperform the mining sector.
After both theGDX and GDXJ broke out of inverted head & shoulder bottomformations last week,many higher-risk juniors have begun to outperform the miners, while others haveyet to react to the move higher in the sector. When the precious metal's sectorcreates a significant bottom during tax-loss silly season, each individualbombed-out junior low depends mostly on when the last seller of sizecapitulates.
Many junior qualitygold stocks have been popping higher from 15-month bullish falling wedge patterns since the beginning of Q4. Thejunior miner ETF closed well above $47 last week, which is a level that hasbeen acting as support this week. With the sector short-term overbought, thisis a good time to buy long-term holdings in quality juniors on weakness.
The Junior Miner Junky service provides complete transparency into my tradingactivities and teaches investors how to navigate this high-risk/high-rewardsector. Subscribers are provided a carefully thought-out rationale for buyingindividual stocks, as well as an equally calculated exit strategy. If yourequire assistance in accumulating a basket of quality juniors with 5x-10xlong-term upside potential, and would like to receive my research, newsletter,portfolio, watch list, and trade alerts, please click here for instant access.
By David ErfleContributing tokitco.com
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