• 398 days Will The ECB Continue To Hike Rates?
  • 399 days Forbes: Aramco Remains Largest Company In The Middle East
  • 400 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 800 days Could Crypto Overtake Traditional Investment?
  • 805 days Americans Still Quitting Jobs At Record Pace
  • 807 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 810 days Is The Dollar Too Strong?
  • 810 days Big Tech Disappoints Investors on Earnings Calls
  • 811 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 813 days China Is Quietly Trying To Distance Itself From Russia
  • 813 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 817 days Crypto Investors Won Big In 2021
  • 817 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 818 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 820 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 821 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 824 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 825 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 825 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 827 days Are NFTs About To Take Over Gaming?
Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Adam Hamilton

Adam Hamilton

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing…

Contact Author

  1. Home
  2. Markets
  3. Other

Bullish PM Technicals

With the US stock markets falling sharply since the elections, shell-shocked investors are scrambling for the exits. And this mass exodus is certainly rational in light of 2013's record tax hikes looming for American investors. But with interest rates near record lows, cash yields nothing and bonds are hyper-risky. So a fantastic alternative for capital is the precious metals, which are very cheap technically.

For many contrarians, the investment potential of precious metals is blindingly obvious. Over the past decade or so, gold and silver have rocketed 638% and 1105% higher at best! But despite these stupendous gains, investment in precious metals remains low. The financial establishment has long discouraged investors from buying gold and silver, as they don't generate all kinds of fees like stocks.

This chronic underinvestment is easily illustrated by the amounts of capital in stocks versus the leading gold and silver ETFs. At the end of last month, all 500 elite companies in the flagship S&P 500 stock index had a collective market capitalization of $13,349b. Meanwhile the total holdings of GLD and SLV were only worth about $73b and $10b respectively, just 0.5% and 0.1% of the capital invested in stocks!

So despite their long secular bull markets, gold and silver still have lots of room left to run. Investors remain radically underinvested in precious metals, even though they were the best-performing asset class of the past decade. And fortuitously for the legions of investors now dumping stocks to avoid the fiscal-cliff disaster, gold, silver, and their miners are actually very cheap technically. Now is an excellent time to buy.

Today's bullish precious-metals technicals are readily apparent in long-term price charts. The goal of investing is to buy low and sell high, and gold, silver, and their miners' stocks are definitely on the low side of historic precedent today. I doubt any other major destinations for stock-market flight capital offer a better combination of proven performance and near-future appreciation potential than the PMs.

Before we delve into the charts, some background is in order. In any bull market, prices rise and fall. They advance two steps forward in mighty uplegs before retreating one step back in sharp corrections. Prices eventually run too far too fast in uplegs, becoming overbought. Then corrections force the other extreme, prices falling too far too fast which leaves them oversold. Soon after is the best time to buy.

But in order to time buying within ongoing secular bulls, investors need some objective way of measuring price action. That removes the deadly emotions of greed and fear, which seduce naive investors into buying high late in uplegs and selling low late in corrections. The buy-low-sell-high mission is to do the opposite, sell after prices have rallied too far too fast and buy after they have dropped too far too fast.

Thus many years ago I created a simple tool to indeed objectively measure price action, called Relativity. It considers prices relative to a slowly-changing baseline, their 200-day moving averages. When this metric is charted over time, it reveals a horizontal trading range. If you aren't familiar with this wildly profitable trading tool, you really ought to read my latest essay on Relativity Trading to quickly get up to speed.

Today gold, silver, and the flagship HUI gold-stock index are all low in their relative trading ranges. They are far closer to being oversold, the time to buy, than overbought. These Relativity charts are compelling. In each the relative multiple, the price divided by its 200dma, is slaved to the left axis in red. And then the actual price is overlaid in blue tied to the right axis. The precious-metals technicals are very bullish today.

Relative Gold 2007-2012

In any ongoing bull, a price pulls away from its 200dma in uplegs before returning in corrections. When the blue gold price above is divided by its black 200dma, the red Relative Gold (rGold) line is the result. It effectively flattens the 200dma line to horizontal at 1.0x and render's gold's movements relative to it in perfectly-comparable percentage terms over time. rGold has formed a well-defined horizontal trading range.

It ranges from gold trading at 1.05x its 200dma on the low side to 1.25x on the high side. The 1.05x line, shown in light green, is gold's relative support. Whenever gold trades at or below this level, it is usually a great time to buy. With the exceptions of that crazy stock panic in 2008 and a high consolidation earlier this year, gold embarked on major rallies soon after it witnessed depressed sub-1.05x rGold levels.

Just this week, rGold was trading under 1.04x. Gold was only 3.7% above its 200-day moving average, meaning it is technically oversold. This metal has fallen deeply out of favor recently. This shouldn't be a surprise, as it always happens after any major upleg peaks. Prices need to either correct sharply or grind sideways long enough to bleed away all traders' excessive greed and euphoria from the preceding topping.

Look at how gold prices have behaved in the past after gold fell below 1.05x its 200dma. In every case gold subsequently rallied, and the longer the time it spent below 1.05x the larger its subsequent gains. The most extreme example was during the stock panic, after which gold blasted 167% higher in 2.8 years! It is provocative that rGold was once again near panic levels this past summer, incredibly oversold.

Leading into its most-recent euphoric topping in August 2011, gold was wildly overbought as I warned at the time. Greed was excessive, with traders assuming the metal was going to keep on surging indefinitely. But trading above 1.25x its 200dma, it had advanced too far too fast to be sustainable. So in order to bleed off that greed, it started to grind sideways. This consolidation has now lasted 15 months, averaging around $1675.

The result is gold has fallen deeply out of favor, greed has been totally eradicated. The corrections or consolidations that follow major uplegs exist to do just that. So we are in a situation today where gold is essentially loathed, where the vast majority of investors have largely given up on it. But this is a dream come true for contrarians willing to fight the crowd, a chance to buy low today before the next upleg.

Secular bull markets are a function of supply and demand, and gold's stellar fundamentals assure its bull is far from over. While global investment demand grows, its supply remains heavily constrained. More and more investors are gradually turning to gold, yet finding and mining this metal remains more challenging and expensive and risky than ever before. Prices rise when demand exceeds supply.

So fundamentally another upleg is inevitable, yet gold remains oversold in relative terms. The last time it spent so long languishing under its 200dma was during 2008's stock panic, and after that it nearly tripled over the subsequent few years. So the stage is set for a truly massive gold upleg in the coming months and years, an enormous move higher. This is fantastic news for investors exiting the risky stock markets.

And as goes gold, so goes silver. The white metal is a leveraged play on what the yellow metal is doing. When gold is rallying, silver amplifies its gains. And when gold is correcting, silver falls faster. So it shouldn't be surprising that the Relative Silver situation today mirrors the bullish technicals seen in gold. Silver has actually been consolidating considerably longer than gold at 21 months, giving it more potential to soar.

Relative Silver 2007-2012

Since silver is far more volatile than gold, the rSilver trading range is naturally wider. Silver is oversold when it falls under 0.95x its 200dma, and overbought when it exceeds 1.40x. After a massive upleg far more extreme than gold's that topped in the spring of 2011, silver has been consolidating around $34 ever since. This has given traders nearly two years to get comfortable with today's price levels as the new normal.

The result of this sideways grind is rSilver near 1.05x this week. While no longer oversold and wildly undervalued like it was this past summer, the white metal still remains low in its relative range. Look at what happened after past episodes where silver was trading near 1.05x after emerging from a support approach. It soon rallied sharply in major uplegs. Odds are this precedent will again repeat soon.

Before this past summer, the last time silver spent so much time so far under its 200dma was during the stock panic. And after falling so deeply out of favor in that episode of extreme oversoldness, silver ultimately blasted a staggering 443% higher over the subsequent 2.4 years. It's provocative that this metal was once again trading near similar panic levels this past summer, implying a major new upleg is now underway.

All short-term price action is dominated by sentiment, greed and fear. And traders' collective emotions swing back and forth between these two extremes like a giant pendulum. The last sentiment extreme witnessed in silver was fear and despair this past summer, which means the great emotional pendulum is slowly starting to swing towards the opposite greed end of its arc. Only a major upleg can generate such greed.

Provocatively one thing that is going to help drive a renaissance in gold and silver investment demand is the Fed's massive inflation. The Fed's recently-announced third quantitative-easing campaign is open-ended, which is incredibly bullish for the precious metals. Washington's central bank is rapidly expanding the money supply to help monetize the Obama Administration's unprecedented record debt growth.

And few things are more bullish for precious-metals demand than monetary inflation. While the fiscal cliff is dominating the markets' attention now, gradually the Fed's rampant inflation will creep into the limelight. The general knowledge of relatively more dollars chasing relatively fewer ounces of gold and silver will lead traders to quickly bid up their prices. Gold and silver certainly won't remain so cheap technically for long.

For over a decade now, we've been formally advising our subscribers to invest in physical gold and silver coins held in their own immediate possession. I started recommending gold coins in May 2001 when it traded near $264, and silver coins in November 2001 when it was just over $4. So to me and our subscribers this whole gold and silver thing is old hat, we've already earned fortunes in this secular bull.

Thus today miners of gold and silver are far more exciting than the metals themselves. This final chart looks at the leading gold-stock index, commonly known by its symbol HUI ("huey"). While gold and silver have fallen out of favor in the recent consolidations, their miners' stocks have been shot and left for dead. They have fallen so far behind the gold and silver bulls that their prospects are phenomenally bullish.

Relative HUI 2007-2012

Like silver, the PM stocks are far more volatile than gold. So the HUI's relative trading range in recent years has also run between 0.95x its 200dma on the low side to 1.40x on the high side. Gold stocks are overbought and due to correct when the rHUI exceeds 1.40x, but they are oversold and likely to rally in a new upleg when this metric falls below 0.95x. As of the middle of this week, the rHUI slumped to 0.97x.

Examine this chart and look what happened after other times the HUI traded near 0.95x. Most of the time major advances soon followed. When PM stocks are oversold and fear reigns, the great majority of the near-term sellers have been squeezed out. So buyers picking up the cheap stocks regain the balance of power and the capital inflows soon drive rallies. The rHUI is positioned perfectly today for another one.

There were a couple major exceptions, when the HUI remained under its 200dma for way longer than normal. The first was during the stock panic, and the second thanks to a brutal gold-stock capitulation this past spring. That once-in-a-lifetime fear superspike ignited by the panic was self-explanatory in crushing PM stocks. Realize that afterwards the HUI soared 319% higher over the next 2.9 years!

So to see the rHUI once again slump near panic levels this past spring and summer is super-bullish. The PM stocks have rarely been so out of favor, which means the sentiment pendulum is overdue to swing forcefully towards the greed side again. And only a major new upleg can generate this emotion. With the short-lived exception of the panic's bowels, we've never seen a better buying opportunity in this entire bull.

The PM stocks are wildly undervalued relative to the prices of the metals they mine, which drive their profits and hence ultimately their stock prices. The HUI has effectively been consolidating around 450 for 60 months now, dwarfing the consolidations in gold and silver. When the HUI first hit 450 in November 2007, gold was trading near $825 and silver had just crossed $15! It was a very different world.

So to see the PM stocks in aggregate trading at the same levels today with gold near $1725 and silver near $32 is ludicrous. As I showed in an essay this past summer, the gold stocks have never been more profitable in an absolute sense. Their valuations are lower than the general stock markets', in true value territory! And they continue to trade near panic levels relative to gold, which simply isn't sustainable.

With gold stocks dirt-cheap and low technically, the opportunities in this sector are vast beyond belief. They could easily double or triple from here during the next gold and silver uplegs. I fully realize virtually no one thinks PM stocks will ever rally again these days, but that is part of their allure. The best investors are the contrarians, that rare breed smart and tough enough to be brave when everyone else is afraid.

I started buying and recommending gold and silver stocks in 2001 when the HUI averaged 60. Just after a mighty secular bull in general stocks, the small fraction of mainstream investors even aware of the precious metals thought anyone buying them was insane. Despite their massive runs in the decade-plus since, PM stocks have always been a highly-contrarian realm. They never captured mainstream acclaim.

So if you are relatively new to PM stocks and their recent years' consolidation has discouraged you, realize that this tiny sector has always been an uphill battle psychologically. The commentary on PM stocks is usually bearish, and after corrections or consolidations predictions of doom abound. Nevertheless, the HUI still rocketed 1664% higher at best over a decade where general stocks were flat at best!

As is always the case when sentiment is the most rotten, the precious metals are great buys today. Their prices are low technically, which is very fortuitous for the flood of capital leaving the risky general stock markets. If you are exiting stocks and need a place to park capital that will stay well ahead of the Fed's inflation and probably even multiply your wealth, it is impossible to beat gold, silver, and their miners.

At Zeal we've been taking advantage of these bullish PM technicals since summer, buying and recommending some of the highest potential gold and silver stocks. Unlike most, we've been studying and trading the PM-stock sector for its entire secular bull. Our hard work over the years has led to great knowledge and stellar gains. All 634 stock trades we've recommended in our newsletters since 2001 have averaged annualized realized gains of +34.8%!

You ought to join us and share in the profitable fruits of our labors. We publish acclaimed weekly and monthly subscription newsletters for speculators and investors. In them I dig deeply into current market action, looking at what is happening, why, and what specific stock-trading opportunities it is creating. It certainly is a fantastic time to deploy in awesome PM stocks, as all our trades are on sale this week. Subscribe today and buy low!

The bottom line is the precious-metals technicals are very bullish today. Gold, silver, and the HUI gold-stock index are all low relative to their 200-day moving averages following long consolidations. In the past, these very conditions have ignited major uplegs. The rotten sentiment that continues to plague this beaten-down and undervalued sector greatly amplifies this bullishness. The PMs are truly due to soar.

And the timing couldn't be more fortuitous with the general stock markets rolling over. With much higher taxes and a continuing weak economy to look forward to, investors don't have many appealing options. But the excessive government spending the Fed is monetizing will lead to serious inflation. So gold, silver, and their best miners' stocks offer a fantastic refuge to grow your capital in a tough environment.


Back to homepage

Leave a comment

Leave a comment