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The precious metals complex had a great rebound at the
end of the summer but is now in the midst of a correction. Recently we wrote that
the correction was nearing an end. We believe that to be the case. A
short-term bottom could occur sometime this week. However, the precious
metals sector was unable to retain much of the very strong momentum it
previously had. Thus, the metals and stocks will need some time to confirm
support and generate positive momentum before they have a chance of breaking
to new highs. That being said, we wanted to take a broader view and analyze
the sector in its current context in comparsion to
the past.
Gold is likely to end up in its longest consolidation,
which would surpass the 2006-2007 and 2008-2009 consolidations. Note the
chart below and our observations on the three consolidations. Gold's current
position is weaker than the previous two consolidations but that won't be of
concern as long as the metal holds above the 400-day moving average at $1650.
Whether Gold holds at $1650 or bottoms at $1600, the metal is likely to
remain in this consolidation for a while.
 
Checking the gold stocks (HUI), we see that the 400-day
moving average provides excellent context. The gold stocks put in a strong
double bottom and rallied up to the moving average. The market is now
correcting the previous overbought state. In the three previous examples, the
market began its rebound off of a major bottom (2000, 2005, 2008) and encountered initial resistance at the 400-day
moving average.
We focus on 2005 and 2008 because those are most
applicable to today's situation. In 2005, the HUI traded around the moving
average for almost three months before pushing up to the previous all-time
high. A similar thing happened in 2009. The HUI wrestled with the 400-day
moving average from May until September before eventually rallying back to
all-time high.
To conclude, there is nothing to be worried about in
regards to precious metals. First, we should note that the shares have been
showing more strength than the metals, which is always a very good sign for
the near future. Second, the metals and more specifically the shares have
been acting exactly as they did within a similar context in the past. After a
rebound from a major low, the shares typically correct and wrestle with the
400-day moving average before embarking on a move to previous highs. Traders
and investors are urged to be patient and accumulate at support when
sentiment is constructive. Now while the market is wrestling with the 400-day
moving average is the time to do your research and find the companies that
will lead the next leg higher and outperform the market indices like the HUI,
GDX and GDXJ.
Good Luck!
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poised for big gains then we invite you to learn more about our service
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