The 2016 gold bull market is on life support as I write this. While gold is still up more than 7% year-to-date and the GDX is up nearly 45% it certainly doesn’t feel that way after the downtrend of the last four months. Since their respective summer peaks gold has fallen from over $1370/oz to below $1130/oz this morning and the GDX has declined 40%!
GDX (Daily – 2016)
After surging more than 150% between January and August the gold miners (GDX) have spent the last four months ‘coming down the other side of the mountain.’ The $18-$20 area in GDX represents potentially the most significant price zone in the entire GDX chart since its inception in 2006.
Gold in its modern era (the 21st century) has become a proxy for investors confidence, or lack of confidence, in the US dollar and as a result, the US economy. Gold has experienced parabolic rises during periods of monetary policy easing (falling interest rates) and pronounced downtrends in the US dollar. However, just as a knife can cut both ways gold has also experienced brutal declines during periods in which investors have regained confidence in the strength of the economy and the US dollar – such as we are experiencing right now.
Since the election on November 8th a perfect storm has formed to help pressure gold more than $200/oz lower since its electon night highs above $1340/oz. Suddenly the consensus expectation is for stronger economic growth supported by expansionary fiscal policy under the Trump administration, higher inflation (but not too high), and a Fed tightening cycle which could include as many as 3 rate hikes in 2017. If we think back to the summer it wasn’t long ago that the Fed was on hold for an indefinite time period, negative interest rates were a growing trend across sovereign debt globally, and economic growth rates were consistently undershooting. How quickly the consensus outlook has changed.
Gold and the gold miners are out of favor, for now. However, a situation almost identical to the one which the precious metals sector faced last January appears to be repeating; expectations are so low that almost any catalyst could trigger a rally. I expect the sector to drift sideways to lower through year end and while shrewd investors might be able to pick up some absolute bargains during the final days of 2016 (particularly among the juniors), I doubt there is any hurry to rush in and buy. The good news is that the gold mining sector is in a much healthier place than it was one year ago after a year of mostly rising gold prices and a substantial slug of financings which have helped to repair depleted balance sheets. Keep your heads up and your powder as dry as you can, I’ll see you in January.
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