Renewed gold weakness has central banks and miners buying

The gold price is gaining bearish momentum as recently re-appointed Fed Chairman Jerome Powell turned from a fiscal dove, to a hawk during testimony in Congress this week. And with concerns easing on Thursday about the risk posed by the newly discovered Omicron variant to the global economic recovery, gold selling pressure has increased.

Once Powell finally admitted before Congress that the use of the word “transitory” is inappropriate to describe inflation, the gold price moved quickly towards key support at $1750. “The word transitory has different meanings to different people,” he added. “It carries a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in terms of inflation. I think it’s probably a good time to retire the word and explain more clearly what we mean.”

In his second day of testimony in Congress on Wednesday, the Fed Chairman reiterated that he and fellow policymakers will consider a faster wind-down to the Fed’s bond-buying program at the upcoming FOMC meeting in mid-December. This move is widely seen as opening the door to earlier interest rates hikes, which has kept pressure on the gold price despite the longer-term implications of rising inflation being bullion-friendly.

After last week’s bear raid to run the stops below $1800 on options expiration day in Gold Futures, the near-term chart posture deteriorated more this week and has invited some technical-based sellers into the market.

On the downside, a weekly close below $1750 would bring the $1720 level back into play before year-end; while a firm recovery above $1810 in Gold Futures could remove the negative tone in the short term. Prices would have to break below $1720 to signal a bearish longer-term outlook.

While gold investors are considering how the Federal Reserve is likely to respond to surging inflation during the upcoming FOMC meeting on December 14-15, three central banks announced this week they have recently increased their respective gold reserves.

Singapore increased its gold reserves by about 20% earlier this year in a largely under-the-radar move that saw holdings expand for the first time since the secular gold bull market began at the turn of the century. The purchases, which totaled over 26 tons, took place over May and June, according to data from the Monetary Authority of Singapore’s International Reserves and Foreign Currency Liquidity reports.

The Irish central bank has also been adding to its gold reserves, announcing the purchase of 2 tons of gold in recent months. This ended a more than decade-long period of unchanged holdings in bullion. While the institution has given no reason for the increase in its stockpile, the Governor Gabriel Makhlouf last week warned that policy makers cannot afford to be complacent on inflation.

Then this morning, Russia’s finance ministry said its regular FX and gold purchases on the market will total 502 billion rubles ($6.81 billion) over the month of December. A Reuters poll of analysts predicted that FX buying would total 475 billion rubles.

According to the World Gold Council, which noted strong purchases by Thailand, Hungary and Brazil earlier this year, central bankers’ appetite for gold grew in the first half of the year. Global reserves expanded 333.2 tons in H1/2021, 39% higher than the five-year average for the period.

Meanwhile, the current depressed situation in the mining space that has resulted from gold’s gloom has provided an opportunity for global mining companies to use strategic M&A to bolster reserves on the cheap. There were two more acquisitions made by major miners this week, along with a merger announcement in the copper space.

On Tuesday, London-based Hochschild Mining announced a $105 million cash offer to acquire Amarillo Gold (AGC.V). The offer, priced at 40c per Amarillo share, will give Hochschild control of the takeover target’s flagship Posse gold project in Goiás State, Brazil and represents a premium of about 66% to the 20-day volume-weighted average price of Amarillo’s common shares on the TSXV on November 29th.

As part of the transaction offer, Hochschild would spin out Lavras Gold Corp to hold a stake in the advanced Lavras do Sul exploration project, also in Brazil. Amarillo shareholders will receive shares in the NewCo, which will be capitalized with $7.8 million cash and hold a 2% net smelter return royalty on concessions outside the current Posse resource and mine plan on the larger Mara Rosa property. Amarillo’s share price closed up 80% on the day.

Also on Tuesday, Canadian firm Capstone Mining (TSX: CS) and Chile-focused Mantos Copper, announced they are merging to form a new, Americas-focused copper producer called Capstone Copper. Under the terms of the deal, each current Capstone Mining shareholder will receive one share of the new company per share owned of Capstone Mining. Current Capstone owners will own 61% of the new company, while Mantos shareholders will own 39%.

Then on Thursday, SSR Mining (SSRM) announced it has entered into a definitive agreement to acquire all outstanding common shares of Taiga Gold (TGC.CA), for cash consideration of C$0.265 per common share. The offer represents a 36% premium to the stock’s closing price on Wednesday and implies an equity value of approximately C$27 million ($21 million) on a fully diluted basis. Taiga Gold’s share price closed up over 28% on the day.

To begin the month of December on Wednesday, the mining sector printed an ominous bearish outside day reversal down, while the gold price saw safe-haven buying. A classic outside day develops after a persistent short-term rally and signals a short-term reversal in sentiment.

After reaching resistance at $35 & $48 respectively in the GDX & GDXJ towards the end of November, it took just two weeks for both miner ETF’s to move from extreme overbought, to extreme oversold on a daily basis. Not to mention the GDXJ/Gold ratio becoming extreme oversold as well, as miner capitulation selling has increased during tax-loss silly season

The last trading date of 2021 for Canadian and U.S publicly traded stocks will be Wednesday, December 29th to record the gain or loss in the 2021 taxation year. But with both the GDX & GDXJ being extreme oversold, the mining sector should begin to bounce soon.

Tax-loss silly season is presenting opportunities for resource stock speculators with cash and patience to take advantage of the current weakness to accumulate quality juniors. If you require assistance in choosing a basket of M&A candidates, and would like to receive my research, newsletter, portfolio, watch list, and trade alerts, please click here for instant access.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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