7/20/2021 8:00am EST - Trading Lab Morning Email

Today is my birthday so that means that gold and gold stocks will definitely be up today. In all seriousness, in the last month the gold miners have underperformed gold itself by one of the largest margins I can ever remember:

GDX vs. GDXJ vs. IWM vs. Gold (since June 21st, 2021)

Since June 21st, gold is up 1.5% while the GDX is down nearly 5% and the GDXJ is down an absolutely dreadful 10.22% - how can this be?

The answer has a lot to do with the 4th line (purple) on the above performance chart, the Russell 2000 (IWM). Your standard small cap stock in the US is down almost 7% since June 21st, and the mid-tier and junior gold miners largely fall into this category. In addition, while gold is higher in the last month it has been trading in a range-bound oscillation around the $1800 for much of that time. Hardly an inspiring performance to motivate fresh money to flow into gold mining shares.

I am very interested to see the Newmont earnings report on Thursday morning. Fellow gold super major Barrick released preliminary production and cost guidance last week and costs were seen rising across the board, especially on its copper production. The market may be increasingly concerned that rising input costs are cutting into gold producers' profit margins.

Turning to the broader equities, it's hard to believe that the S&P 500 is within a few percent of all-time highs while fear is at its highest levels in more than a year:

CNN Money Fear & Greed Index

Notice how investor greed (confidence in higher prices) peaked at the end of 2020, and 2021 has been characterized by deteriorating investor confidence. Meanwhile, the performance of the S&P 500 has covered up significant damage beneath the market surface. The Russell 2000 small cap index is down 10% from its highs, and many sectors are down 15%-20% in the last couple months - some of the riskiest individual stocks are down 50% or more from their 1st half 2021 highs.

I believe the extensive damage beneath the surface is a product of what we saw in 2020, with many individual stocks and sectors doubling, or even tripling in relatively short periods of time. A deep correction was inevitable, and now it is here.

The question now becomes "Are we near the end of the correction, OR are we staring at another December 2018 or March 2020?"

I will focus on the reflation stocks/ETFs such as CAT, CCJ, FCX, and OIH to inform me as to the health of the market. These stocks are all sufficiently oversold that they could experience big snapback rallies imminently - if such rallies do not materialize relatively soon, then we are likely in for a deeper decline in equities.

Yesterday, I spoke with the KE Report and I believe I probably sealed my fate as the least loved gold market commentator by stating "I am a contrarian, I take the Fed at its word......"

KE Report - Goldfinger 7/19/2021

Cory made a point that many gold/mining bulls have been saying to buy the sector for the last few months, and it has done nothing but continue lower. I will conclude by saying the following, It feels to me like a washout low is very close and I have rarely seen the following combination of factors occur simultaneously:

  • Many quality juniors/producers at or near 52-week lows.
  • Balance sheets across the sector as cashed up as I can ever recall.
  • Some of the most exciting drill programs I have seen in three decades watching the mining sector are underway.
  • The worst sentiment I've seen since the March 2020 lows.
  • The gold/mining sector is now at the beginning of its strongest seasonality of the year, tailwinds that extend for the next 6-8 weeks.
  • In recent days sellers have become indiscriminate and price/volume action has little to do with fundamentals and everything to do with people "just wanting out".

Any froth that may have existed in mining shares earlier in the year has been violently wrung out of share prices in the last few weeks. This is a fertile environment for upside surprises, and a tradable rally to begin to take hold. 

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.