- The Gold Juniors Index tumbled over 5% yesterday with Powell suggesting that the July hike may be isolated, and did not necessarily suggest a new trend in rate cuts.
- This pullback in the index is entirely normal, as all parabolic moves typically see some backing and filling to shake out weak hands.
- The next key support for the Gold Juniors Index comes in at the $35.05 level.
While many bulls have been busy greedily adding to positions and counting unrealized profits the past couple of weeks, the writing was on the wall for a pullback in the Gold Juniors Index (GDXJ). As mentioned in my previous article, the index had rallied up towards the 50% retracement zone from its August 2016 highs, and this typically is a sticky spot for an index on the first test. Usually, unless the news is overwhelmingly favorable, an area with this much significance is unlikely to be broken on the first attempt. When it came to Powell’s quarter-point cut yesterday, this was not enough to sustain a 45% rally in 40 trading days for the Gold Juniors Index. The cut itself is bullish for both gold and the miners, but Powell’s remarks that this is not guaranteed to be a move towards a further rate-cutting cycle was a perfect excuse for a sell-off. This sharp drop likely has some investors who chased the rally getting nervous, but this is perfect, and exactly what I was hoping to see. In the context of this bigger picture, this pullback is entirely normal and likely has a little further to go before it’s time to start nibbling again.
It is incredible how price can suddenly change sentiment, and despite the mining indexes being up nearly 40% since their May lows, we now have some market participants flipping to bearish after a one-day drop. One day does not make nor break a trend, and the trend in the Gold Juniors Index is definitively up. As we can see from the below weekly chart, the index has unraveled after testing $39.25 resistance but has a key support level at $35.05 level about 5% lower. If we were to head into this zone over the next week or so, we would likely be able to get those who paid $39.00 or higher for GDXJ to puke up their shares into a re-test of prior resistance. Prior strong resistance levels often act as new support levels, and irrational selling into support would be a perfect spot to begin adding to positions. If this $35.05 level does not hold, even stronger resistance sits at $33.10 on GDXJ. The below weekly charts clearly show a trend of higher highs and higher lows, and a sharp 10% pullback after a 40% rally is not a rally-killer, it’s a sentiment killer – there’s a big difference.
As we can see from the below chart I’ve built of price, we have one higher low in the Gold Juniors Index and two higher highs, and this is the definition of an uptrend. What we’ll be looking for now is a higher low ideally in the $33.00 – $35.00 region which would bolster this bull market thesis as it would show that funds are showing up to add to positions into weakness.
If you have studied how the best performing funds trade, they do not chase stocks nor ETFs when they are up 40% in 40 trading days, and instead they let retail do the chasing, and then pick up the scraps when those same traders panic out 10-15% lower due to buying at irrational levels short-term. This is what I believe we are going to see over the next couple of weeks, and therefore, I do not see further weakness as any reason to panic. If this bull market is for real, the funds let retail chase above $38.00 on GDXJ and are now going to happily repurchase shares off them between $34.00 – $36.00.As long as the GDXJ bulls defend the $33.10 level on a monthly close, this bull market remains intact, and 10% plus pullbacks towards the $35.05 region are likely buying opportunities.
Two of the most attractive miners and my two top takeover targets continue to be Marathon Gold (MGDPF), and Osisko Mining (OBNNF). Both companies have world-class projects in safe jurisdictions, with Marathon Gold having the highest-grade open-pit deposit in Canada, and Osisko Mining having the highest grade underground project owned by a junior in Canada. These projects are must-haves for intermediate or major gold producers in an environment where meaningful discoveries are becoming rarer each year. These are two areas where I will be looking to buy the dip if this pullback does continue.
Powell’s admission yesterday that yesterday’s cut was not the beginning of a new rate-cut cycle was likely to save face after using one of his bullets when many economists believed it was not needed. More cuts will come in the future, and I still expect another cut by Q1 2020. Based on this, the long-term picture for gold and the miners remains bullish.
The VanEck Vectors Junior Gold Miners ETF (GDXJ) was trading at $38.09 per share on Thursday morning, up $0.55 (+1.47%). Year-to-date, GDXJ has gained 11.60%, versus a 12.73% rise in the benchmark S&P 500 index during the same period.
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About the Author: Taylor Dart
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..