Metals Miners: Breakout Confirmed

In my last article, I analyzed some of the core components in the VanEck Vectors Gold Miners ETF (NYSEARCA: GDX) and established a forecast which suggested fund flows directed at the gold mining sector had displayed characteristics indicative of an early-stage breakout. Over the last week, those forecasts have been proven to be highly accurate as several names within the mining industry have broken out of long-term downtrends and posted incredible double-digit gains in the process.

On June 20th alone, Eldorado Gold Corp. (NYSE: EGO) rallied more than 15% (before extending gains above $5.40 per share on the following day). During the same session, IAMGOLD (NYSE: IAG) posted intraday gains of more than 14%. Similar results were seen in Hecla Mining (NYSE: HL), Yamana Gold (NYSE: AUY), and Coeur Mining (NYSE: CDE) as shares of all three companies traded higher by more than 11% in a single day.

Of course, these are incredible gains which actually outpace the average annual returns of the S&P 500 dating back to 1957 (7.96%). But what is even more impressive about the validity of this years bullish trade call for the metals complex is the fact that it occurred while markets were trading under the pressure of long-term weakness. From a trading perspective, these are the circumstances under which our most difficult trading decisions must be made. How difficult can it be to pull the trading trigger in anticipation of a reversal when all the chips are down? In reality, what this shows us is that the potential for enhanced returns is fully attainable as long as we stay true to our trading rules and wait for confirmed signals as they develop throughout the market.

For many metals investors, the primary focus has been placed on recent actions at the Federal Reserve. Chairman Jerome Powell has indicated in his policy commentaries that the U.S. economy might actually be in need of supportive interest rate measures. The candid nature of Powells comments has actually been viewed as a breath of fresh air for many market participants. But while these events maintain a high level of importance for those trading the precious metals complex, it does not really tell us the full story.

Interest rates alone can go far in defining sentiment for the public-at-large and this can have a dramatic influence on the price trajectory of the markets key assets. However, we must seek out confirmation in the underlying macroeconomic data before we can reasonably pull the trigger on active trading positions. As I have written previously, supply and demand fundamentals are being influenced at the official level, as central banks continue to buy gold at an almost alarming rate.

In the past, I have also discussed the various ways nonfarm payrolls figures can act as a primary indicator of trend trajectories in the metals complex and other global assets. Jobs figures tend to be my favorite way of gauging economic sentiment because the underlying trends in the U.S. labor participation rate and data reports like the nonfarm payrolls release and can influence many other peripheral aspects of the economy.

According to the Bureau of Labor Statistics, the U.S. economy added a mere 75,000 new jobs last month. On its own, this report was a massive disappointment relative to the market expectations of 180,000 new hires. However, there were also significant revisions made to the prior-month performances. U.S. jobs figures from March were downwardly revised to 153,000 (from 189,000 previously) and the figures from April were downwardly revised to 224,000 (from 263,000 previously). Essentially, this indicates a reduction of 75,000 jobs (which occurred even before the poor performances seen in the most recent figures).

All of this suggests that we could see investors continue to favor precious metals as a protective safe-haven instrument. From a technical chart perspective, the latest rallies in GDX have forced valuations through prior resistance levels at $23.45 in a move that was initially signaled by a bullish moving average cross (which occurred after the formation of a sideways trading range on the shorter-term charts). Another important point to remember is that this move is evidence of a breakout that is industry-wide. This is not an isolated event that saw a single gold mining stock rally as a result of a strong earnings release or an encouraging news event.

Rather, the entire sector is in the midst of a massive reversal higher which has invalidated the pressure of long-term bearish momentum that has been in place since the middle of 2016. In other words, this is not a trend reversal which should be viewed as a fluke event that is short-term in nature. As markets have made a clear reversal from a long-term bottom, we can reasonably say that a new trend is firmly in place both for the gold miners and for the precious metals complex as a whole.

Critical support levels for GDX have now moved up to the $22.20 region and prospects for continued rallies remain intact as long as this price level holds firm. Ultimately, it is starting to look like the second half of 2019 could be a very interesting period for those with long positions in gold-related assets and I fully expect to see continued moves higher in the VanEck Vectors Gold Miners ETF throughout this period.