After an already extreme overbought gold price exploded to an all-time intraday record high of $2152 to begin the month of December, prices pulled back towards key support at $2000 into Fed Week as trader’s banked short-term windfall profits. Once the gold price had gone too far, too fast, the safe-haven metal was due for a consolidation of outsized gains.
By the time gold closed last Friday following release of a better-than-expected U.S. Non-Farm Payrolls (NFP) report, the safe-haven metal had fallen a dramatic $138 from the all-time high hit on Sunday evening during a thinly traded overseas session. Gold Futures closed the week at $2014 after making a low of $2010 going into Fed Week.
A nasty intraday reversal candle on the weekly chart understandably brought out the bears in full-force, calling the move a false breakout based on renewed U.S. dollar strength and expectations of a hawkish Fed during the final FOMC meeting of 2023. By Wednesday afternoon, as traders awaited results of the meeting at 2pm EST, Gold Futures had fallen below key support at $2000.
As expected, the Federal Reserve voted unanimously to keep its benchmark interest rate unchanged within the current range of 5.25% to 5.50% for a third consecutive meeting. Additionally, however, the committee indicated the possibility of at least three rate cuts in 2024. The stark shift in the Fed outlook with 17 of 19 policymakers seeing rates lower by the end of 2024 fueled Wall Street bets of rate cuts as early as March.
Moreover, the Fed’s “dot plot,” which reflects individual members’ expectations, suggested the potential for four rate cuts in 2025 and three more in 2026, bringing the rate down to between 2% and 2.25%.
The announcement of a time-line to the long-awaited Fed pivot led to a positive response from traders, with the gold price moving up $40 in just an hour of after-market trading as Treasury yields and the U.S. dollar came under strong downward pressure. With a 4-month Head & Shoulders topping pattern having formed on the USDX, the world’s reserve currency touched a fresh four-month low on Thursday after the Fed indicated that its interest-rate hiking cycle has ended and that lower borrowing costs are coming in 2024. A weekly close later today below neckline support at 103 in the USDX, could take the U.S. Dollar into a bear market which would be bullish for the gold price heading into 2024.
Although Gold Futures made an intraday all-time high above $2090 earlier this month, a monthly close above this level is required for a technical breakout to be in place. A monthly/quarterly/yearly close above its last line of resistance at $2100 on December 29 would likely trigger a strong advance next year with an initial Cup & Handle breakout target of $2500, and Fibonacci measurements being $2460 and $3300.
Meanwhile, gold miner ETFs quickly began to form the potential right shoulder of a bullish 6-month inverse Head & Shoulders pattern with neckline resistance at $33 in GDX, and $39 in GDXJ. With tax-loss selling and fund redemptions having dried up in many juniors ahead of year-end, this high-risk sector has shown signs of capitulation selling ending over the past month.
Most investors complete their tax loss sales by mid-December, thus creating a notable drop-off in selling pressure in the final two weeks of the year. Once resistance at $39 is taken out in GDXJ with convincing volume, quality juniors should begin to move sharply higher as they have plenty of catching up to do relative to the miners, which set a significant bottom last year at this time.
When the gold price begins to create a new floor at $2000, as opposed to being 12-year resistance, gold stock shorts would be forced to cover after a technical breakout in the gold price is confirmed as generalists begin to return to the precious metals complex.
All bull markets begin with short-covering, which subsequently brings in value investors and momentum traders. And once the under-valued and under-owned GDXJ begins to outperform the historically over-valued S&P 500, this will bring in fund managers who would not otherwise buy the precious metals mining space.
The Fed coming pivot euphoria also took the Dow Jones Industrial Average to a new high on Wednesday, but was not confirmed by an all-time high in the S&P 500 or Nasdaq. Powell cautioned that the economy may have more surprises ahead during the subsequent press conference on Wednesday, while this could be the moment of maximum optimism for equity traders.
As we head into the end of 2023, general equity sentiment is at bullish extremes. Yet, gold stocks are at bearish extremes, having never been this cheap in relation to gold which is also trading at all-time highs.
With rate cuts now expected to provide further support for gold, investors might not be able to ignore the value in the mining sector much longer. According to Bank of America, 71% of wealth advisors hold 0-1% of gold in their portfolios, while the entire market cap of the mining space is equal to less than Home Depot’s at just $300 billion. In her latest commentary, Imaru Casanova, Portfolio Manager of VanEck's Gold and Precious Metals Fund, said: "At approximately $1,935 per ounce, the average gold price so far this year is the highest ever annual average. Gold companies, on average are producing gold at all-in sustaining costs of approximately $1,300 per ounce. While high inflation
definitely hit margins these last couple of years, costs appear to be under control, and gold companies are generating a lot of free cash flow."
However, there are far too many juniors chasing a limited amount of capital who also expect a major miner to eventually buy them out. There are simply too many juniors attempting to de-risk marginal precious metals projects, while most are trying to convince a market devoid of retail generalist investors that a mid-tier or major is going to buy them.
Yet, the reality is that very few of them have discovered anything that a major or a mid-tier miner would even look at, because they are not large-scale deposits with blue-sky potential. Although several mergers of equals have recently taken place, which is positive for the sector, many of the lifestyle juniors remain and should be avoided.
Global miners are patiently waiting until juniors de-risking multi-million-ounce gold projects with blue-sky potential are so desperate that they have zero bargaining power, then expect to take them out at bargain basement prices. This is why it is so important to concentrate on quality juniors de-risking large projects controlled by serially successful management teams with access to capital and plenty of skin in the game to dissuade take-under bids.
Accumulating a basket of these juniors capable of riding out the storm until the sector turns have the most upside potential with the lowest downside risk, as most of them are now trading at perpetual warrant prices.
The last time we saw a similar set-up in the gold stock complex, creating a low-risk opportunity in best in breed juniors at fire-sale prices, was in late 2015 which proved to be a significant bottom. Once the algorithm
switch flipped from ultra-bearish to newly bullish during the second week of 2016, both GDX and GDXJ surged over 140% in just 6-months, while several quality juniors experienced 5-10x gains.
Recent events have created a generational opportunity to accumulate historically undervalued quality precious metals related juniors ahead of the most important gold breakout in over 50-years. But with so many lifestyle juniors littering the playing field, proper stock selection is key when accumulating a basket of juniors to hold before the next major up-leg takes place.
Once gold breaks out to new all-time highs, the mainstream media will start paying attention to gold stocks, while momentum traders and fund managers will begin moving into the under-owned junior space. With most generalists still on the sidelines, it is best to position oneself before the herd comes into this tiny sector.
In anticipation of the incredible gains the junior sector will begin to experience once the gold price prints a technical breakout above $2100, the Junior Miner Junky (JMJ) newsletter has accumulated a basket of quality juniors with 3x-10x upside potential into 2025-26.
If you require assistance in accumulating the best in breed precious metals related juniors, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.
