The precious metals sector is enduring losses for the third straight week.
The gold miners and Silver have led the way down, though Silver has rallied
over the past two sessions. Gold has also rallied yet remains dangerously close
to making a new weekly low for the bear market. While the metals recovered
some losses on Wednesday and Thursday, the gold miners failed to generate anything
positive and closed near their lows for each session. The inability of the
miners to recover to even a small degree augurs badly for the entire sector
in the days ahead.
Continued weakness in the miners is not much of a surprise considering they
are breaking down from their 2008 and 2014 lows. We plot monthly bars below
for GDM (forerunner to GDX) and the HUI. GDM closed at 468 and lacks strong
support until 400. The HUI is in full blown breakdown mode and does not have
strong support until the low 100s.
In the chart below we plot the HUI's weekly price going back 20 years and
two oscillators which can serve as overbought and oversold indicators. We plot
the HUI's distance from its 40-week exponential moving average and its rolling
40-week rate of change. The HUI is certainly oversold but these two oscillators
argue the HUI is some distance from reaching the extreme oversold condition
seen in spring 2013, late 2008 and late 2000.
Turning to Gold, it appears ripe for a breakdown below $1150/oz in the days
ahead. If that comes to pass, then the focus should be on its next strong support
around $1000/oz to $1040/oz. The chart below includes the weekly plot of Gold
as well as the net speculative position as a percentage of open interest. The
net speculative position will be updated Friday and figures to be close to
10%. In our view that needs to go below 5% (the 2013 low) for sentiment to
be considered extreme. A reading below 5% would mark a 14-year low.
We appear to be in the early stages of the final act in this precious metals
bear market. Gold breaking below $1140-$1150/oz could put us in the middle
stages. Our work shows that miners are not yet extremely oversold and have
room to fall before reaching strong support. Gold breaking below $1150/oz and
then $1100/oz would initiate further losses in the miners and bring them very
close to that extreme oversold condition. It is the combination of an extreme
oversold condition coupled with strong technical support that creates a very
favorable buying opportunity.
A few weeks ago we noted that it was potentially a very dangerous time for
bulls. It still its. However, the closer the miners get to extremely oversold
and the closer Gold is to $1000/oz then the closer we are to risk favoring
the bulls. It is always darkest before dawn. At somepoint within a few months,
the switch will flip and we could have some epic buying opportunities in the
precious metals complex.
