Miner Selling Continues Despite Recent Gold Strength
(Kitco News)- Since Vanguard announced a majorrestructuring of itsVanguard Precious Metal and Mining Fund (VGPMX) on July 27th, thesell-off in the GDX has increased much more than the selling in gold. The fund’sinvestment strategy is shifting from investing 80% in mining companies and 20%directly in precious metals, to 25% in mining companies and 75% broad globalstock market exposure with an affinity for commodity-oriented companies.
Although thenew strategy is not expected to become effective until late September, tradershave been fading this restructuring and the VGPMX fund manager has most likelybegun selling contained miner equity holdings. Vanguard is among the largestproviders of actively managed funds in the world with more than $1.2 trillionin active assets, so it is not surprising the gold stock selling began to pickup steam in relation to the gold price after this announcement. The evidence ofthis being a major contributing factor in the miner equity sell-off can be seenin the GDX/Gold ratio chart, which has been in waterfall declinesince the beginning of August.
We had asimilar gold fund restructuring announcement in April 2017, when Van Eckannounced a massive rebalance trade around the junior miner fund GDXJ. The ETF wasrequired to sell $3 billion worth of its existing holdings to buy the newadditions, which created a massive funding trade significantly impactingexisting names. At the time, this created a buying opportunity in a few of thequality juniors which were sold down, or cut from the fund.
Since theGDX is the world’s most popular gold stock investment vehicle and a barometerfor the mining sector, traders have been selling down most of the juniors whodo not mine gold as well. This relentless selling in the miners is creating anextremely over-sold situation which has the potential to create a “sling-shot”move higher in the precious metals miner complex once a bullish catalystappears. Many technical indicators are still near extremes in gold, which issuggesting that a reversal in trading direction is very close.
Meanwhile,the speculative short selling in gold remains at extreme levels and silver hasnow joined the record books as having the highest non-commercial net shortposition in history as well. Since late July, the bulls have been pounding thetable over the extreme managed money short position in gold being a contrarianbuy signal. But the sector has continued to crater, lacking a catalystmeaningful enough for shorts to begin covering in earnest.
The Gold/Silver ratio is also running towards its highreached in October 2008 at over 93, which is where the beginning of the lastminer bull market began as gold bottomed at $680. Once the GDX bottomed duringthe financial crisis in late 2008, near the levels it is trading today, themajor miner ETF ran to over $63 in three years. Silver always outperforms goldon a rally and with the ratio above 85, we are getting a strong indication thatthe rally may be coming soon.
Weakness maypersist as we head into the FOMC meeting on September 26th and thenext support level to watch on the downside in the already extremely over-soldGDX is the $16 region. The September rate hike is fully priced in by the marketand the August Non-Farms Payroll Report (NFP) released this morning matched theforecast. Since the Fed’s rate hike cycle began in December 2015, the preciousmetals complex has typically sold off into each FOMC meeting.
The TrumpAdministration will soon be announcing the decision on whether to impose anadditional $200 billion in tariffs on Chinese imports, which will cause morevolatility in the gold sector. If the tariffs are delayed pending furthernegotiations the U. S. dollar should drop, giving the precious metals complex aboost. But if the tariffs are implemented, we could see the GDX continue itsdownward path towards the aforementioned support level.
On theupside in GDX, we will need to see the $20.50 level breached on a weekly basisfor confirmation of a major gold stock bottom being in place. A break above$1220 in December gold could begin a short squeeze in the record managed moneyshort positions in both gold and silver. This may provide the fuel necessary toreach this level, so all we need is the proper catalyst to ignite the fuse.
Caution isstill advised and a large cash position is recommended to take advantage ofsome very good entry points, which are beginning to appear in quality juniorswith proven management teams. Stop by my website at www.juniorminerjunky.com and sign up for my free email list. You willreceive this column in your inbox each week, along with interviews and updateson my subscription service availability.
By David ErfleContributing tokitco.com
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newsfeedback@kitco.comwww.juniorminerjunky.com Disclaimer: The views 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 accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.