Last week we noted the likely negative impact of a sustained rebound in the US dollar on gold. Recent weakness in precious metals has not been much of a surprise considering the sector’s relative weakness months ago amid a weak US dollar. While the greenback has bottomed, it has yet to push above resistance at 94. Nevertheless, gold and in particular the gold stocks are threatening more losses even before a push higher in the greenback. It is time to be defensive and cautious.
Although VanEck Vectors Gold Miners (NYSE:GDX) is holding its 200-day moving average and has yet to pierce its October low, VanEck Vectors Junior Gold Miners (NYSE:GDXJ) already has. The juniors (GDXJ) closed below their October low and broke their uptrend line from May. This, after failing twice at the 200-day moving average. The break below $33.50 projects down to $32.00. The juniors lack strong support until $30 while GDX’s initial support levels are $22 and $21.
Gold, which traded as high as $1308 early last week, closed the week at $1280. Its initial support is at $1255-$1260. If GDXJ joins GDXJ and breaks its October low then we would anticipate gold does the same. In that case, the next strong support level is around $1215-$1220. Gold’s net speculative position of 41.9% of open interest remains relatively high and suggests potential selling power should traders turn bearish.
The big picture view on miners is they remain in a complex bottoming pattern that began over four years ago. While the multi-year outlook favors a break of the 2016 highs and a massive move higher, the near-term outlook is clearly bearish. GDX and GDXJ appear very likely to test their July lows and there is a risk they could even retest their December 2016 lows at $18 (GDX) and $27 (GDXJ).
The near-term outlook for precious metals and gold miners especially is negative and traders and investors should therefore stand aside and wait for more favorable conditions. Readers who follow our work are not surprised as we’ve written about the possibility of a weak fourth quarter since the middle of September. That is the bad news.
The good news is those who buy weakness in the months ahead could position themselves for a strong 2018. Find the best companies and wait for the sector to get oversold and test strong support.