The gold mining miners spent much of January consolidating gains after the late December / early January bounce off mid-December lows. We had been waiting to see if the move off December lows would be the end of the down cycle or just prove to be a dead cat bounce. Monday's price action on the widely followed NSYE Gold Miners Index (NYSEARCA:GDX), the Junior Gold Miners Index (NYSEARCA:GDXJ), and the Silver Miners Index (NYSEARCA:SIL) suggests that this rally should bring the mining indexes at least back to the highs of 2016.
We had remained fundamentally bullish on gold miners throughout 2016. First, in a world of massive central bank currency devaluation, gold is the only currency-equivalent that can't be devalued by central bankers. Second, with profligate monetary policy and a new U.S. president looking to ramp up fiscal spending, the inflation-protection quality of gold will also be valued in the near future. Finally, gold is a hedge against a black swan event or a major blunder by the new Trump administration. We expect gold miners to be inversely correlated to the S&P 500 (NYSEARCA:SPY) should something prick the stock market bubble this year. The Q4 2016 selling in the precious metals complex was not fundamentally driven, as evidenced by the V-shaped turn-around in the miners. We maintained reduced positions in the miners during the correction, but will now be looking to increase our exposure during an "orderly" pull-back, as defined below.
Monday's +7.7% surge higher in the GDXJ confirmed the end of an almost-four week trading range. In addition, Monday's close on the GDXJ broke the November swing high and the Fibonacci 38.2% retracement of the correction at $41.26. We can expect profit-taking to pull the GDXJ back towards $38.40, which we would define as the "orderly" pull-back. Should the price fall back into the "red zone", much more caution will be needed in buying the dip.
The gold price (NYSEARCA:GLD) has enjoyed the recent selling in the dollar index (NYSEARCA:UUP). Monday, gold broke to a new 2-month high (top chart) as the dollar index (bottom chart) has ceded over -3% so far this year. We expect in dollar index to rebound in the coming days. The 2017 dollar pull-back stopped on a dime (excuse the pun) at the Fibonacci 38.2% ($99.27 precisely) retracement level and is set for opening gains on Tuesday. The key factor to monitor in the coming day is how the gold price reacts to dollar gains in the coming days. If gold can hold $1220, this would be mega-bullish for gold Bulls. We would need to see any gold pull-back to stop north of $1180 to stay in the game.
Disclosure: I am/we are long GDX, GDXJ, SIL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.