Gold Sentiment Not Bearish Enough

By: Jordan Roy-Byrne | Fri, Mar 20, 2015
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Precious metals are closing the week out with a good rally. The Federal Reserve nonsense proved to be a catalyst as it can be in either direction. Regardless of the Fed, the precious metals sector was oversold and due for a bounce. We wrote about that last week. Maybe this could be the bear market bottom. Maybe not. It concerns us that Gold is rebounding from an area of insignificant long term support amid sentiment that is not at a bearish extreme. Extreme bearish sentiment coupled with very strong support raises the probability of a major rebound or bear market bottom. I don't see that for Gold, yet.

Below is a weekly line chart of Gold with its net COT position at the bottom. Gold will close the week around $1180/oz and avoid a break below the channel. However, Gold's COT is far from a bearish extreme. Gold's three best rallies in the past two years began with its net speculative position at or below 10% (of open interest). As of last Tuesday the net position was 22%. Gold may need this to be below 10% before it can bottom.

Weekly Gold Chart

In the next chart we plot the premium/discount to net asset value (NAV) for a pair of closed end funds. CEF (which is shown at the top) is a closed end fund that owns Gold and Silver. GTU is a closed end fund which owns Gold. Both funds are currently trading at +7% discounts to NAV. While a 7% discount is big it is well below the largest discounts seen in late 2000 (~18%) and late 2014 (13%). GTU's largest discount was 12% in late 2014.

Central Fund of Canada Daily Chart

Interestingly, the mining companies aren't expecting or may not be prepared for $1000-$1100/oz Gold. The graph below is from consulting firm PwC. Look at how few companies are valuing their reserves and resources at sub $1200 Gold!

Corporate Valuations of Gold Reserves

With the sector in a downtrend, bulls need to see some combination of extreme bearish sentiment, extreme oversold conditions and strong technical support. Metals and miners are rallying so sentiment figures to improve a bit before it can reverse course. In the big picture sentiment is quite bearish but the indicators argue it's not quite at an extreme. The COT is one example and the premium/discount in closed end funds is another. Technically, Gold does not have strong support until well below $1100/oz. We'd like to see Gold falling below $1100/oz, getting more oversold and nearing strong support with sentiment reaching bear market extremes. Those are the conditions for great buying opportunities that can lead to a bear market bottom.

 


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Jordan Roy-Byrne

Author: Jordan Roy-Byrne

Jordan Roy-Byrne, CMT
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