Technical analyst Clive Maund uses charts to
explain why he believes the gold bear market is over.
Thursday was a momentous day for the precious metals sector with gold, GDX
and other índices, and giant gold ETF, GLD all breaking out on impressive
volume, and this development was all the more extraordinary because it
happened when the broad stock market was crashing. This is viewed as a
strong sign that instead of being dragged lower still by a crashing stock
market, the precious metals sector will soar. Silver hasn’t broken out yet,
but it should soon follow suit.
In recent weeks we have been wary that, despite highly favorable COTs and
Hedgers charts and rotten sentiment indicators, etc,. a general asset
liquidation might drag the precious metals sector even further down, but
Thursday's extraordinarily positive action by the sector serves to allay
those fears. Of course, it's not hard to see why the precious metals sector
might do the opposite to what it did back in 2008 when the market crashed,
and it nosedived too. There are two very big differences this time. One is
that, before the 2008 crash, the precious metals sector was actually quite
elevated. That is in marked contrast to now where it is beaten into the
ground with sentiment in the basement – basically it is so unloved and
neglected that the only way is up. The other big difference between now and
2008 is that while a major asset liquidation cycle will result in a flight to
cash that could drive the dollar significantly higher, beyond that the
longer-term outlook for the dollar is grim, with much of the rest of the
world, tired of U.S. bullying in the form of sanctions, military threats, and
now trade wars, and its unquestioning support of rogue states like Saudi
Arabia and Israel, committed to freeing themselves from dollar hegemony – and
plans in this direction are now well advanced, with countries like China and
Russia having built up big gold reserves that can at some point be used to
back their currencies, and workable substitutes for the SWIFT payments system
at the trial run phase. Subjected to continuous provocation, China may at
some point decide to go for the "nuclear option" and dump its huge
Treasury hoard, sending the Treasury market reeling and interest rates
skyrocketing, which will cause the US economy to buckle and implode – the
U.S. appears to be overlooking that China has this power.
Let’s now review the charts to assess the significance of Thursday's
breakout. We start with gold where we see on its 6-month chart that it staged
an impressive high-volume breakout from a rectangular trading range that
formed following the low in mid-August. Right up until the breakout the
pattern was ambiguous with the price being pressured by the falling 50-day
moving average, so that it could easily have broken down again. Thus this big
up day, with the price breaking clear above not just this average but also
the resistance at the top of the pattern, was certainly an event of
significance. The minor reaction on Friday is normal and provided us with an
opportunity to pounce on the sector, having grasped the magnitude of
Thursday's action.
We don’t need to dwell much on the latest COT chart for gold, beyond
pointing out that it is the most bullish COT we have seen since 2001, with
the dumb Large Specs actually shorting gold to a significant degree as of
last Tuesday night. A chart like this means that gold has the potential for
huge gains from here.
And how about this latest gold Hedgers’ chart – folks, it just doesn't get
much better than this (above the dotted green line is very bullish)…
Chart courtesy of sentimentrader.com
How does what is going on on gold’s chart fit into the larger picture? To
get a handle on that we will now take an updated look at gold's 10-year
chart. You may recall that when gold crept up to the resistance at the top of
the presumed giant base pattern earlier this year, we did not expect it to
drop back again, or at least, not by as much as it did, but having dropped
back more than we expected – and lambasted precious metal stocks in the
process – it has arrived back in the broad zone of quite strong support
shown. Now what appears to be going on is that it has just marked out another
"shoulder" low of a complex Head-and-Shoulders bottom with multiple
shoulders. Certainly, the now powerfully bullish COTs and Hedgers charts
strongly suggest that it isn't going any lower, and it was heartening to see
that it was not perturbed at all by the broad market cratering last week – on
the contrary, it loved it! This is the strongest indication we could hope to
see that this time, gold and the precious metal sector are going to go
contra-cyclical and rally when the broad stock market drops, or during a
general asset liquidation.
Emphasizing the importance of the breakout in gold on Thursday was what
happened in the giant gold ETF, GLD, which acts as a massive conduit for
investors in gold bullion. GLD gapped above its 50-day moving average on huge
volume, the biggest in well over two years, and closed clear above the
resistance level at the top of its recent rectangular trading range, like
gold itself. This is viewed as very bullish action indeed and as a sure sign
of a major trend change. Notice also how, as with gold, this breakout was
preceded by a progressive easing of downside momentum as shown by the MACD
indicator.
Now we come to the precious metal stocks' big breakout on Thursday, which
we will examine on the chart for GDX. While we certainly recognized that the
pattern forming in GDX was a potential Head-and-Shoulders bottom, we remained
suspicious of it right up until the breakout for two reasons. One was the
unfavorable volume pattern while it formed resulting in a weak accumulation
line (which was also the case with gold and silver), and the other was the
fear that precious metal stocks might be taken down by a crashing stock
market – but happily the opposite seemed to be the case, with precious metal
stocks seemingly thriving on the general mayhem – and why not? – as the most
unloved sector around for years it's time for a change of fortune. In any
event, as you can see, what must have been an internal improvement ahead of
the breakout was heavily camouflaged, which was why we didn’t buy ahead of
it, but the big volume on this breakout, especially in GLD, means that it
should be "the real deal" and not a deceptive pop, especially as it
happened when the broad market tanked.
The latest chart for the Gold Miners Bullish % Index shows that there is
still a low percentage of investors bullish on the sector, which is of course
positive.
A very important point for would be investors in the sector to grasp is
that you shouldn't be put off by missing Thursday's breakout and having to
pay higher prices for most larger gold stocks. They may in some cases be
about 5% higher in price than they were last Tuesday or Wednesday, but that
is NOTHING compared to the massive gains that these stocks are capable of
making from here – don't forget that this sector has been ground into the
dirt by a 7-year bear market and has huge ground to make up, and the great
news is that more the broad stock market gets clobbered, the higher the
precious metals sector will go. Buyers now have the assurance of knowing not
just that the sector has broken out, but also that it has the capacity to
rally strongly when the rest of the market is cratering, as it has just
demonstrated.
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Charts provided by the author.
CliveMaund.com Disclosure:
The above represents the opinion and analysis of Mr Maund, based on data
available to him, at the time of writing. Mr. Maund's opinions are his own,
and are not a recommendation or an offer to buy or sell securities. Mr. Maund
is an independent analyst who receives no compensation of any kind from any
groups, individuals or corporations mentioned in his reports. As trading and
investing in any financial markets may involve serious risk of loss, Mr.
Maund recommends that you consult with a qualified investment advisor, one
licensed by appropriate regulatory agencies in your legal jurisdiction and do
your own due diligence and research when making any kind of a transaction
with financial ramifications. Although a qualified and experienced stock
market analyst, Clive Maund is not a Registered Securities Advisor. Therefore
Mr. Maund's opinions on the market and stocks can only be construed as a
solicitation to buy and sell securities when they are subject to the prior
approval and endorsement of a Registered Securities Advisor operating in
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