We wrote about the gold miners (NYSEARCA:GDX) about 4 weeks ago and stated that this asset class was looking to regain long-term support. In fact, the declaration by the Federal Reserve that sustained quantitative easing would be the norm going forward resulted in GDX rallying more than 20% over the past month. With sentiment skyrocketing in the precious metals sector, in general, the question now is whether this rally can be sustained or if there are lower lows ahead of us?
There are two trains of thought with respect to how the fundamentals are lining up in the gold mining sector at present. Due to coronavirus cases growing exponentially in many countries, many miners have had to wind down their operations in order to keep their workers safe from the deadly disease. This trend is obviously going to adversely affect earnings this year. The scale of the impact is still unknown at present as we do not know how long this pandemic will go on for.
The world's biggest miner, Newmont (NEM), for example (which is a good read on where GDX is headed), had to suspend operations in its Yanacocha mine in Peru as well as multiple mines in Canada and in Argentina. Its Mexican operations were also hit, so earnings are obviously going to be affected in the near term. Depending on the jurisdictions where restrictions will be lifted, Newmont will be looking for a gradual return to full production. Even if a vaccine becomes available quite quickly to alleviate the problem, earnings will most likely see a sizable drop in the second quarter.
However, many gold investors will be aware of the fact the demand for physical gold has skyrocketed in recent weeks. This is the exact opposite of the energy industry where crude oil prices have totally plummeted
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