Gold and gold mining stocks were setting up for a rebound until the market
suddenly priced in tighter policy from the Federal Reserve. Both nominal and
real yields surged and that pushed an already oversold sector below key support.
Gold lost support in the mid $1100s while gold stocks (GDX) lost a critical
support level. While the sector is oversold and likely to rebound as 2017 begins,
the primary trend remains lower.
Our first chart plots Gold and the real yield on the 5-year TIP security.
The US Treasury provides daily data and it gives us a look at day to day changes
in real yields. The real 5-year tips year yield closed last week at an 11-month
high. Stronger real yields hurt Gold’s desirability as an investment. This
is why Gold and gold stocks have sold off.
We had expected Gold to rebound from the $1140/oz to $1155/oz range but it
declined to as low as $1124/oz. Its next weekly support is from $1085/oz to
$1095/oz. An immediate rebound to resistance at $1155/oz could setup a decline
down to $1085/oz. The other scenario is Gold immediately dumps down to $1085-$1095/oz
before beginning a sustained rebound.
Turning to the gold stocks, we see that GDX broke below a key level at the
end of last week. It had been holding above $20, which was a confluence of
strong support. The weekly candle shows a clear breakdown below that support.
GDX could snapback to the breakdown point near $20 which would setup a decline
to support at $17. The other scenario is it plunges to $17 this week. GDXJ
lost support at $32.50 and dumped 12% last week. Its next strong support is
around $27.
Although Gold and gold stocks are very oversold and sentiment indicators are
bullish, the breakdown in price signals that more selling could occur before
the sector rebounds. A big rally in Gold is more likely to begin from $1095-$1095/oz
than from $1120/oz. The gold stocks could also test lower levels before a sizeable
rebound begins. We had expected a rebound but the sector brokedown. We were
wrong. However, our bearish big picture view remains on target. We reiterate
that we do not want to buy investment positions until we see sub $1100 Gold
coupled with an extreme oversold condition and bearish sentiment.
