Precious metals are closing the week out with a good rally. The Federal Reserve
nonsense proved to be a catalyst as it can be in either direction. Regardless
of the Fed, the precious metals sector was oversold and due for a bounce. We
wrote about that last week. Maybe this could be the bear market bottom. Maybe
not. It concerns us that Gold is rebounding from an area of insignificant long
term support amid sentiment that is not at a bearish extreme. Extreme bearish
sentiment coupled with very strong support raises the probability of a major
rebound or bear market bottom. I don't see that for Gold, yet.
Below is a weekly line chart of Gold with its net COT position at the bottom.
Gold will close the week around $1180/oz and avoid a break below the channel.
However, Gold's COT is far from a bearish extreme. Gold's three best rallies
in the past two years began with its net speculative position at or below 10%
(of open interest). As of last Tuesday the net position was 22%. Gold may need
this to be below 10% before it can bottom.
In the next chart we plot the premium/discount to net asset value (NAV) for
a pair of closed end funds. CEF (which is shown at the top) is a closed end
fund that owns Gold and Silver. GTU is a closed end fund which owns Gold. Both
funds are currently trading at +7% discounts to NAV. While a 7% discount is
big it is well below the largest discounts seen in late 2000 (~18%) and late
2014 (13%). GTU's largest discount was 12% in late 2014.
Interestingly, the mining companies aren't expecting or may not be prepared
for $1000-$1100/oz Gold. The graph below is from consulting firm PwC. Look
at how few companies are valuing their reserves and resources at sub $1200
Gold!
With the sector in a downtrend, bulls need to see some combination of extreme
bearish sentiment, extreme oversold conditions and strong technical support.
Metals and miners are rallying so sentiment figures to improve a bit before
it can reverse course. In the big picture sentiment is quite bearish but the
indicators argue it's not quite at an extreme. The COT is one example and the
premium/discount in closed end funds is another. Technically, Gold does not
have strong support until well below $1100/oz. We'd like to see Gold falling
below $1100/oz, getting more oversold and nearing strong support with sentiment
reaching bear market extremes. Those are the conditions for great buying opportunities
that can lead to a bear market bottom.
