The gold stocks bounced strongly today after the February jobs report confirmed
the Federal Reserve will hike interest rates next week. While precious metals
rallied strongly following the previous two hikes, I’m not so sure today marks
the start of a big rebound. For one, the Federal Reserve could hike rates again
in July. Second and more important, the technical setup argues for more back
and forth action in the weeks and months ahead. While the current price action
in the gold stocks is different from that in the previous cyclical bull markets,
we do think we have found one viable comparison for the current correction.
Although the gold stocks may rally for a few weeks in the short-term, I see
them testing the December lows or close to those lows before retesting their
February peaks. If this occurs and the correction that began last summer remains
in effect, then what does that mean for the larger picture?
Put simply, the gold stocks formed a historic low in January 2016 and are
undergoing a sizeable correction (in price and time) to the record advance
that took place in the first half of 2016. A long and deep wave 2 correction,
though not typical has a few historical examples.
In the chart below we plot the housing and banks sectors, which endured a
sizeable wave 2 correction (in price and time) in 2010-2011 before exploding
higher from late 2011 to early 2013.
These two sectors share several key similarities to the gold stocks at present.
They endured a devastating bear market of more than 80%. (It was the worst
bear market in over 80 years). They rebounded strongly from their historic
2009 bottoms. In particular, the banks surged 250% in 12 months. Then both
sectors corrected 44% in a correction that lasted 17 months and longer than
the initial rebound. Finally, note that the banks and housing sectors experienced
a technical breakdown (C leg) in late 2011 that effectively served as a massive
bear trap and a tremendous buying opportunity.
With respect to the gold stocks, the point is additional technical weakness
and a breach of support will likely be a great buying opportunity and not a
sell signal. Gold stocks in January 2016 were the cheapest they had ever been.
Going forward over the next few months, the closer they trade to those levels,
the better buying opportunity it is. Given the historical context, one should
not overreact if the miners lose their 400-day moving averages or temporarily
break their December lows. Due to the gold stocks being only 15 months removed
from such a historic bottom, there simply aren’t enough new sellers to drive
the sector that much lower.
The gold stocks appear to be following a rare but viable example of a lengthy
bull market correction. Unless they can rally back to their February highs
soon then the analog to the housing and banks sectors remain in play. That
aligns with our outlook of the spring and summer being a grind. As we noted
last week, the way to play this setup is to buy weakness and avoid chasing
strength. We are actively looking for bargains that we can buy and hold through
this period into the next big move higher.
