Is this gold ETF overbought?

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July 23, 2019 10:20am NYSE:GDX NYSE:GDXJ

  • The Gold Juniors Index is up 45% off of the June low, and is running into its 50% retracement area off of the 2016 highs.
  • While the index put together a powerful breakout through key resistance at $38.00, short-term it’s beginning to register overbought readings short-term.
  • I see starting new positions here as high-risk, and believe investors should wait for a sharp dip before adding to their miner exposure.

As we head into arguably one of the most critical weeks for gold (GLD) this year, the probabilities of a rate cut at next week’s July meeting now sits at 75% for a quarter-point cut, and 25% for a half-point cut. While I would argue that a good chunk of gold’s move is priced in based on only a quarter-point cut, a half-point cut could put a renewed bid under the metal as this would be an even more drastic pivot from prior policy expectations in Q4 2018. Inflation is typically good for gold, and the Fed taking their foot off the brake on inflation to this degree would undoubtedly bolster the intermediate-term picture for gold. Gold’s performance since the initial pivot in Powell’s policy has been tremendous, with the metal up 14% in barely two months. Even more impressive has been the explosive rally off of the June lows for the Gold Juniors Index (GDXJ). The index bulldozed through resistance last week above the $38.00 level, has put in new 52-week highs, and we’re starting to see some of the powerful daily moves in these names like we enjoyed in Q1 of 2016. This is excellent news for the bulls long-term, and the majority of juniors remain holds at this time. However, the one issue I see short-term is that things are beginning to get a little frothy.

Let’s take a look:

 

 

 

 

 

 

 

 

 

 

 

 

(Source: CmeGroup.com)

As we can see from the above weekly chart of the Gold Juniors Index, the miners are up in a nearly straight line and have risen in a near 80-degree fashion. This type of strength is typically seen at the start of a new bull market, but parabolic rallies are often prone to sharp and violent short-term corrections. While the index was grinding higher in a controlled fashion for most of June, this rally has turned into a parabolic advance over the past two weeks. This shift to a parabolic push higher has increased the probabilities of a pullback significantly, and it is extremely rare that parabolic advances cool themselves off by going sideways or consolidating. Instead, these parabolic advances typically end in short-term tears as corrections can be fast and severe to shake out weak handed retail traders.

(Source: TC2000.com)

So why should the rally stop here? It does not have to by any means, and it could continue for a little longer, but I see the reward to risk at these levels as very poor for adding new exposure. As we can see, the Gold Juniors Index has run straight into its 50% retracement off of its August 2016 high which comes in around the $39.25 level on GDXJ. The good news is that there are several support levels stacked below on the index, and any sharp pullbacks of 7% or larger are likely to be buying opportunities. The key is for the bulls to defend $35.05 support at all costs, however, on a weekly closing basis.

While the Gold Juniors Index is likely setting itself up for higher prices into Q4, I believe the most likely scenario here is a pullback or some consolidation to shake out some weak hands. For this reason, I see adding new exposure at these levels as quite risky, and a very poor allocation of capital and instead believe the better opportunity is to take advantage of a 7% – 10% correction in GDXJ towards $37.00 to put new exposure on. As long as the Gold Juniors Index stays above $35.05 on a weekly close, any pullbacks can be considered as noise.

One of the top takeover targets in the space which I am personally long, which I will be watching closely to add to is Osisko Mining (OBNNF). The company’s first outfit was taken over by Agnico Eagle (AEM) and Yamana Gold (AUY) in 2014, but they’ve rebuilt a second company, Osisko 2.0, with the same management team. Osisko has a high-grade deposit in Quebec with multiple discoveries thus far across a 3.5-kilometer strike length, and nearly 3.5 million ounces at average grades of 9.0 grams per tonne gold to show for it. The stock has broken out of a broad base at $3.45 CAD, and I believe any pullbacks to this base are buying opportunities. The stock is my #2 takeover target in the gold junior sector.

 

About the Author 

Taylor Dart has over 10 years of experience in active & passive investing specializing in mid-cap growth stocks, as well as the precious metals sector. He has been writing on Seeking Alpha for four years, and managing his own portfolios since 2008. His main focus is on growth stocks outperforming the market and their peers. In addition to looking at the fundamentals, he uses different timing models for industry groups, and scans upwards of 2000 stocks daily to identify the best fundamental opportunities with the timeliest technical setups.  Taylor is a huge proponent of Trend Following and the “Turtles” who enjoyed compound annual growth rates of over 50 percent per year.


The VanEck Vectors Junior Gold Miners ETF (GDXJ) was trading at $39.93 per share on Tuesday morning, up $0.11 (+0.28%). Year-to-date, GDXJ has gained 16.99%, versus a 12.31% rise in the benchmark S&P 500 index during the same period.

GDXJ currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #10 of 33 ETFs in the Precious Metals ETFs category.


This article is brought to you courtesy of StockNews.


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