The bottoming process for gold and silver shares has been arduous as
they've oscillated back and forth for almost a year. We noted a month ago
that the
failed breakout in March was strong evidence that an interim top was in
place. Heading into this week it looked like the miners would fall further
before finding support. However, over the past two days the sector clearly
reversed its short-term course. For now this appears to be a rebound from an
oversold bounce.
We plot GDX, GDXJ and SIL in the chart below. As of Monday's low, the
miners were very oversold in a small space of time. From recent highs GDX was
down 18%, GDXJ 27% and SIL 21%. Thus the miners were ripe for a bounce. The
bullish reversal on Monday coupled with confirmation on Tuesday signals that
a rebound is underway. The initial upside targets are the open gaps from six
days ago and the 50-day moving averages.
Is this low the right shoulder of a head and shoulders pattern and the low
that springboards the sector to a sustained advance?
It is really difficult to tell. My gut says no. Most of the precious
metals sector failed to rally all the way back to the 2013 summer highs. We
previously noted, this in addition to the strong weekly reversal was a sign
of weakness. It seems unlikely the market would begin a major move higher
only a single month later. Thus, we think more weakness is possible after
this rally. However, we always should keep an open mind when the outlook is
uncertain.
The chart below plots the strongest indices which includes Canadian
indices such as the TSX Global Gold Index and ZJG.to (the Canadian GDXJ) as
well as GLDX (explorers), SILJ (silver juniors) and TGLDX (Tocqueville Gold
fund). While a right shoulder could be forming it appears that more time and
consolidation could be necessary. The time between the left shoulder and head
is about five and a half months. Translate that forward for the right
shoulder and June could be apt for the next low.
We should be vigilant and note the various possibilities. Inflation is
starting to creep higher, by the preferred indicators of the market. Last
week the Labor Department reported that wages increased at the fastest pace
in more than four years. Both the CPI and PPI accelerated from February to
March. The WSJ
reported that big banks are ramping up lending. Meanwhile, commodity
prices (CCI index) broke out of their multi-year downtrend and have held firm
close to 12-month highs.
The capital markets only care about the margin. Just a small sustained
increase in inflation expectations could drive precious metals to confirm a
bottom and the miners to begin a move that would break out of this long
bottoming base. We are not saying this is imminent. We are thinking about
what could be the driver of the future breakout in this sector. In the
meantime, we sold all hedge positions yesterday and continue to actively
research the sector for the absolute best opportunities. The next few months
could be your last best chance to accumulate the companies poised to benefit
from the coming revival in precious metals.
Good Luck!
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