Since the end of December we've been writing about the coming bottom in precious
metals. Our forecast for 2013 was to see a low in Q1 and then continued consolidation
until the end of the summer in which Gold could be in good position to break
$1800. That forecast remains largely intact, although it appears the mining
stocks will bottom quite a bit lower than we thought two months ago and even
five months ago. Three weeks ago we noted that a potential final bottom was
on the way. After beating around the bush we are ready to say that now is the
time to begin buying and we'll show you why.
Technicals
In our article
three weeks ago we noted this major trendline support for the gold stocks.
The market is about 6% from this major trendline which also coincides with
the 62% retracement of the 2008 to 2011 cyclical bull.
Let's zoom in on the short-term for GDX as we prefer it to the HUI above.
We already know the major support trendline (for the sector) is nearby. The
sector is approaching that support in an extreme oversold condition. GDX has
shed 31% in the past five months and 18% in just 21 days. Moreover, note the
three open gaps and how they've occurred following an already substantial decline.
Hence, these gaps are a reflection of emotion which leads to panic. If we see
a final gap then it is likely to be an exhaustion gap which would signal a
reversal is imminent.
For Gold & Silver I show weekly candle charts as they give us an idea
of the bigger picture. That picture is one of long consolidation after significant
gains following the 2008 low. Recall the price action from 2009 to the 2011
peaks. Gold gained from $950 in the summer of 2009 to a peak of $1923 in the
summer of 2011. In the same period Silver went from $13 to $49. Folks, these
are massive moves that take time to be digested. By time we mean quarters to
years, not weeks or months. As we sometimes try to decipher every wiggle, it's
easy to forget that point. Turning back to the present, pay attention to how
the metals close this week and the next few weeks. There is major support at
these levels and we expect to see the metals hold the ranges denoted on the
chart.
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Let's throw in the S&P 500 for a little intermarket analysis. We have
the gold stocks extremely oversold and Gold and Silver at major support while
conventional equities are nearing major resistance. Which side seems to be
a better buy right now? Moreover, note how each subsequent advance is getting
weaker as well as shorter. Mainstream pundits like to laud this as a great
bull market. The S&P rebounded 105% in the first two plus but in the 22
months since it is up only 8.8%. This is hardly a resemblance of a new secular
bull market. Go look at 1942 to 1946 and 1982-1986 to see how secular bull
markets actually begin. The S&P 500 has a cyclical bear market in between
now and the start of the next secular bull.
Sentiment
Jason Goepfert the brilliant creator of sentimentrader.com,
notes that Gold's public opinion is at its second lowest reading in a decade.
Gold has declined in price since this data was updated. Perhaps it could reach
the lowest in 10 years?
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Meanwhile, in other sentiment news, Dan
Norcini notes that hedge fund short positions in Gold are at a 5-year
high and Bloomberg
noted that bets on higher Gold prices fell to the lowest since 2008.
I stumbled upon this chart which I think is from Option
Strategist. It shows the weighted put-call ratio for GDX. It's at a 27-month
high.
Another from sentimentrader.com is
data from the Rydex Precious Metals Fund. This is a fund focused on mining
stocks. Assets in the fund have declined 50% in just the past four months!
From Q1 2011 to Q2 2012, assets gradually declined. Recent action shows panic
and capitulation. Relative to all sectors, this fund's assets are inches away
from reaching a minimum of a six-year low.
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Conclusion
The technicals show the precious metals complex as extremely oversold and
nearing strong support. This coincides with extremely negative sentiment which
is bullish from a contrary perspective. Anecdotally speaking, I am amazed at
the explosion of negative press in just the past few days. I can't remember
anything like it since I began following this market in 2002. Some stocks may
have already bottomed while the HUI/GDX could have one nasty day left. We have
begun to layer into a few positions and will continue to next week. If you
have cash, now is the time to use it on both the metals and the stocks.
Good Luck!
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