Mark Twain said
that history doesn't repeat itself but it rhymes. This is also true in the markets. No bull or bear market or particular event is ever
the same. Yet, because there are similarities, the prudent analyst
always studies history. When trying to foresee bottoms and tops we always compare current
conditions (price action, sentiment, fundamentals) to past
conditions. We continue to believe
that the recent bottom in precious metals markets falls into a group of major bottoms that includes 2000-2001, 2005 and 2008. In today's
piece we examine how these markets evolve following such bottoms which hopefully can give us an idea of what to expect in the coming weeks and months.
First we show a chart of the HUI, Gold and Silver
during the 2005 bottom.
For the equities, the 2005 bottom
was a successful retest of the 2004 bottom. Gold
and Silver actually bottomed in terms of price in May 2004 and made a higher
low in early 2005. The metals showed relative strength prior to the bottom while the shares emerged first after the bottom. It's important to note that no
damage was present in any of these markets at the time of the 2005
bottom. We should also note that while the HUI and Gold confirmed their bottoms within months, Silver didn't close above its initial high (early June) until October.
Next we look at the 2008 bottom. The precious metals markets broke to multi-year lows (ex- Gold) and reached a historic oversold reading amid significant technical damage. Again, while the HUI and Gold bottomed
and confirmed the bottoms
in a span of six weeks, Silver didn't break out of its base until January.
The 2000-2001 bottom is somewhat of an outlier. The equities bottomed first in late 2000 followed by Gold which bottomed a few months later. Silver didn't bottom until a year after the equities bottomed. This was the end of a
generational bear market and thus, each market was
extremely oversold and rebounded from great technical damage. The equities quickly embarked on a significant bull
move while the metals lagged for months.
Turning to the present, the
gold equities are in the lead again
while Silver is the laggard.
What do the observations of past
bottoms tell us about this
recent bottom? First, Silver has lagged during every bottoming process. Thus, Silver should continue to lag for several months. Second, Gold
and Silver (unlike in 2001 and 2008) did not break
to new lows. They held the December low. This is similar to the 2005 bottom in which Gold and Silver bottomed in May and began a move towards a breakout in September.
The HUI typically retests the low within seven weeks. In 2001 and 2005 there wasn't much of a retest while in 2008 the HUI retested the low about a month after the bottom. Today is about a month after the May bottom and it doesn't look
like a retest is coming. Moreover,
while 2005 was a retest of 2004, it came 18 months after the initial peak. In other words, the current bottom has few similarities to that of 2004 which would imply a
retest at a later date.
Essentially, the weight of the evidence argues that GDX/HUI is not likely to retest its low.
Want more evidence why this is
the case? Take a look at
the next chart courtesy of The Short Side
of Long. This chart shows the positioning of the respondents
in the latest Merrill Lynch fund
manager survey. The
participants manage $700 Billion. Relative to history,
fund managers are extremely
underweight the materials
sector. Looks like its time for Joe Hedge Fund to dump his Starbucks and tech stocks and buy some gold stocks.
are quite favorable that
the Gold sector will
continue to rebound. Notice that
we say Gold sector as history shows that Silver could
lag. As we noted last week, the sector has bottomed but it's important to know which
parts will outperform now and which parts will outperform later. Gold producers lead during the initial recovery. Later, the Silver sector assumes leadership. Juniors begin
strong outperformance when Gold breaks to a new high. Presently,
we continue to focus on the producers
and juniors best positioned for and most likely to take advantage of this next leg
up in this bull market.
If you'd be interested
in professional guidance then
we invite you to learn more about The DailyGold’s
Jordan Roy-Byrne, CMT