8/12/2020 9:00am EST
When I hit send on Friday's Trading Lab Morning Email, little did I know that just two trading days later gold and silver would be obliterated in a deluge of selling. I wrote the following words Friday morning:
"...if you care about risk vs. reward then you can't ignore the overstretched euphoric sentiment and parabolic price action.
A correction is close at hand."
The market has a way of surprising even those of us who thought we were prepared. Suffice to say, I did not expect the extent and ferocity of yesterday's selling across the precious metals sector. There is a garden variety correction (~5% over 1-2 weeks), and then there is a single-day crash like we saw yesterday with many high quality mining shares down double-digit percentages.
Something that i'm sure all of us have noticed this year is that everything happens faster in 2020. News travels at lightspeed and millions of people react in seconds/minutes to breaking news, videos, tweets, etc. The market is no different. Moves happen very fast and trades are occurring around the clock in a matter of milliseconds.
Is it possible that the correction is over? Perhaps yesterday was it, and now gold and silver begin working their way higher?
Anything is possible, however, it's not likely that yesterday's obliteration was a one day event that won't have reverberations over the coming days/weeks.
Last night's low in the December gold futures contract was $1874.20, more than $200 below the all-time high put in place just five days ago. That's a roughly 10% decline in a few trading sessions.
Steep.
It's also worth pointing out that a ton of sell stops were triggered in gold last night below the $1900-$1905 support zone:
You know it's a stop run when the market V-bottoms relatively quickly.
The $1920 level now becomes important support in December gold, and obviously $1900 is a big psychological level. I don't want to see gold end this week below $1900 as it would print a very large bearish engulfing candlestick that 'engulfs' the bodies of the previous two weekly candlesticks.
Gold bulls have their work cut out for them over the next three trading sessions because many traders will see yesterday's trading session as a signal that gold/silver are "wounded animals" and there is blood in the water. Traders will look to hunt gold and silver from the short side over the next few days.
Of course, this dynamic will eventually set up a market that is ripe for a big short squeeze. However, first we need to see price stabilize and volatility decline before we can hope for a big short squeeze to ensue.
From a bigger picture perspective yesterday looks like nothing more than a blip within the context of a secular bull market:
Gold (Monthly - 15 year)
Monthly gold chart with dotted horizontal lines showing bands of support below
If nothing else yesterday's precious metals 'crash' was a good reminder of the dangers of using leverage to trade volatile markets. It will also serve to cool off some of the froth we have seen build-up in the precious metals sector in the last couple months. Precious metals bulls have become too sure of themselves, this includes me.
If the market is good at one thing, it's good at humbling those who are too sure of the future.
As I wrote in the Trading Lab yesterday I think we're in for a couple weeks of sideways to lower price action, and probably some more shaking of the trees in the junior mining sector. I don't think there is any hurry to call a bottom and get aggressive from the long side. Even if gold bounces back to $2,000 today it doesn't mean it won't retest the $1870s next week.
However, I believe there will be some great opportunities for shrewd investors to buy some cheap shares this month.
Make a shopping list of your favorite stocks and identify the levels at which you would like to buy them. Then be patient and perhaps put in some stink bids.
Yesterday, I shared a slide from an excellent presentation by Kenorland Minerals which illustrated the power of new discoveries in the mining project life cycle:
Discovery is the largest value addition during the cycle of a mining project.
Enough said.
There are a lot of companies out there drilling right now, however, only a dozen or less are likely to make what will be deemed a true discovery of economic merit.
I believe two of those companies could be Gold Lion Resources (CSE:GL) and MacDonald Mines (TSX-V:BMK). Gold Lion is an Idaho focused junior gold explorer with an impressive portfolio of projects, including the Robber Gulch oxide gold property located near Burley, Idaho.
Yesterday, Gold Lion announced encouraging results from phase 2 soil sampling at Robber Gulch that revealed a promising geological setting for Carlin-type mineralization with similarities to the Penn-Perm geology at Liberty Gold’s Black Pine project. Gold Lion will receive drill permits within the coming weeks and then the company will carry-out a fully funded drill program at Robber Gulch, the first on the property since 1986.
The phase 2 soil sampling results highlight two main anomalous zones, termed the Central and West anomalies, which are characterized by large and coherent >100ppb Au-in-soil anomalies (up to 756ppb Au) within a broader footprint of elevated (>25ppb Au) gold. Additionally, a new anomaly was discovered to the south which remains open and may be an extension of the West anomaly below post mineral volcanic cover.
Gold Lion is one of my favorite pure exploration stories out there and I look forward to visiting Idaho next month when drilling is underway at Robber Gulch.
Another strong gold exploration story is MacDonald Mines. Yesterday, MacDonald announced that it has launched the summer 2020 exploration program at its SPJ property, located 20 kilometers east of Sudbury, Ontario.
Drilling has restarted with an initial 2,000 meters of an anticipated 14,000 meters drill program to further define the geometry of the Scadding Deposit with its newly discovered zones and extensions. The summer program includes a campaign of drill holes targeting a series of folds and hinge zones that host the recently discovered high-grade gold mineralization at Scadding. Groundwork, geophysics and drilling will also continue on several other regional targets on the large SPJ property.
Quentin Yarie, President and CEO of MacDonald commented, “We are excited to launch into a systematic, district scale exploration program this summer on this recently identified IOCG system – a first in the Wanapitei area. For 2020, we will continue to build on our newly interpreted structural model utilizing modern exploration techniques. We plan to refine and prioritize drilling targets of the high-grade hinge and fold zones at Scadding and expand the model over several new targets on our 18,340 hectares land package. With an aggressive and fully funded program for 2020/21, we look forward to providing consistent news flow to our shareholders throughout the year.”
MacDonald just closed a C$4.25 million financing and the company has all the money it needs to drill its high-grade gold targets (including a 2020 intercept of 59.2 grams/tonne gold over 19.07 meters) at Scadding well into 2021.
Both BMK and GL will generate significant news flow over the coming months and both companies have a real shot at making a new game-changing discovery that could create substantial shareholder value.
I own both BMK and GL. I will be happy to add to my positions on weakness in the share price over the coming days.
Disclosure: Author owns shares of BMK.V and GL.CA at time of publishing and may choose to buy or sell at any time without notice. Author has been compensated for marketing services by Gold Lion Resources Inc. and MacDonald Mines Ltd.
DISCLAIMER: The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.
