As bad as conditions have been for gold and precious metals stocks in recent weeks, they could be on the verge of getting much worse. Some key indices, exchange-traded funds and individual stocks are nearing critical support levels, leaving little room for further weakness before the sector breaks down completely.
Here are the levels you need to watch to determine whether to position for a bounce or stay out of the way:
SPDR Gold Shares (GLD)
The SPDR Gold Shares (GLD) ETF has been falling with virtually no let up since the beginning of August, bringing it within striking distance of its 52-week low of $114.46. The last time GLD traded below this level was 2010, about the midpoint of what would prove to be a three-year rally.
This means that there will be virtually no recent support below $114.46, which creates the potential for substantial short-term downside beneath this level.
GLD 1-Year
A bad sign for gold is that silver was sitting on similar support coming into this week, and it punched right through without putting up a fight. The iShares Silver Trust (SLV) is now at a 52-week low, and it’s trading at its lowest levels since 2010.
SLV 5-Year
Market Vectors Gold Miners ETF (GDX)
The situation isn’t much brighter for gold stocks or other precious metals names right now. The Market Vectors Gold Miners ETF (GDX) is so far holding support at $22, but if it breaks this level it has 10% downside to its next support level at $20. Under $20, there’s nowhere to hide: the last volume in this range was printed nearly six years ago in the depths of the 2008 financial crisis, with the all-time low established at $16.37 in a one-day downward spike.
GDX, 10-Year
The corresponding levels to watch on the main precious metals indices are 79.72 for the PHLX Gold/Silver Sector (XAU) and 188.93 for the NYSE Arca Gold BUGS Index (HUI).
XAU, 1-Year
A potential warning sign for the broader indices and the GDX ETF is that a number of individual gold names have failed to hold key support levels this week, including Yamana Gold (AUY), Kinross Gold (KGC) and Harmony Gold (HMY). It’s also worrisome that the largest stock in the sector — Barrick Gold (ABX) — is just pennies away from a 52-week low and perilously close to levels last seen in 2002.
ABX, 1-Year
Global X Silver Miners ETF (SIL)
Gold isn’t alone in its misery. Silver’s collapse to a multi-year low has dragged down the Global X Silver Miners ETF (SIL) close to its support at $10.46, below which there is no volume history due to the ETF’s 2010 inception.
SIL, 5-Year
Among individual names, key stocks to watch are Hecla Mining (HL) and Silver Wheaton (SLW), both of which are closing in on support levels of their own.
Is It Time to Buy?
Gold and precious metals stocks have been an excellent source of opportunity for traders over the years. Those with the patience to let downturns overshoot before jumping in to buy have frequently been able to capitalize on enormous short-term relief rallies. Silver Wheaton, for instance, has experienced two 30%-plus rallies this year alone. With the sector so blown out and the relative strength indices in the 20s, this appears to be one of those times.
Still, investors need to be careful: As discussed here, the primary driver of this downturn has been the persistent rally in the U.S. dollar and the corresponding collapses in the other major global currencies. On this front, imminent relief is nowhere in sight, as both the euro and yen remain in free fall with no source of near-term technical support.
The Guggenheim CurrencyShares Euro Trust (FXE), for example, has another 5% to fall before it hits support in the $120 range, which leaves room for a substantial amount of pain in the weeks and months ahead. The potential saving grace on the currency front — more dovish indications from the Fed — won’t be on its way anytime soon: the next Federal Open Market Committee meeting isn’t until Oct. 28-29.
FXE, 5-Year
The Bottom Line
Gold and precious metals charts may look like an opportunity here, but the danger remains high. Those looking to trade these volatile sectors need to keep a close eye on the charts. As important as currencies are to this sector, at this point it’s all about the technicals.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
