With each passing rally hope has bloomed that the bear market in precious
metals may be over. The long and deep "forever bear" has to end but it hasn't
yet. Under the surface, the bear market is getting weaker and Gold is growing
stronger. It's showing strength against foreign currencies and has broken its
downtrend relative to equities. These are very positive developments and a
precursor to the birth of a new bull market. However, the weak rebounds in
the metals coupled with the potential for a US Dollar breakout advise us to
continue to remain patient and cautious.
In looking at the price action in both Gold and Silver I see no character
change in either market. They are rallying in similar fashion to rallies of
2014 and 2015. Since Gold first formed a weekly low in November 2015, it has
rebounded a mere 6% in a little over two months. It hasn't even tested the
200-day moving average at $1133/oz or the major resistance at $1140-$1150/oz.
Meanwhile, Silver has been even weaker as it hasn't been able to sustain any
strength or rebound in the past few months.
The current fledgling rebound in Gold compares quite poorly to the rebounds
that followed major lows in 1976 and 2008. Gold is up only 6% since its weekly
low from nine weeks ago. Nine weeks following the lows from 1976 and 2008 Gold
rebounded an average of 19.5%. That would put Gold at $1262/oz. If Gold bottomed
late last year then at the very least it likely would have already rebounded
to major resistance at $1180-$1200/oz.
Furthermore, if the US Dollar index was not consolidating in a bullish manner
then Gold and Silver would be acting much stronger. In other words, Gold and
Silver would be showing quite a bit more strength if the US Dollar index was
likely to resolve its consolidation to the downside. Gold usually leads the
US Dollar at key turning points.
The greenback has digested its massive gains in bullish fashion. It has held
above the 38% retracement, the 200 and 400-day moving averages. It is trading
nearly at the exact same level as a year ago yet the current net speculative
position is at roughly half of its level of a year ago (51.7K contracts now
versus 101K contracts in March 2015). In other words, plenty of speculation
has come out of the market yet it remains less than 2% from new highs.
The strength in the gold stocks could give bulls some hope but refer back
to our statement last week. The gold stocks, while initially following the
stock market could resume their decline once metals have resumed their downtrends. The
gains this week exceeded our expectations but our statement stands. If the
metals reverse course then the gold miners are likely to follow that move and
not the stock market itself (which has rebounded as anticipated).
While good things are happening under the surface for Gold, its lack of a
strong rebound in recent months argues that such a rebound is in the future
but not imminent. Gold's steady downtrend could resume in the next week or
two. As a result, precious metals bulls should be ready to hedge and then wait
for an extreme oversold condition amid extreme bearish sentiment before turning
bullish.
