"No warning can save people determined to grow suddently rich" - Lord Overstone

  • 14 hours The Secretive Wall Street Firm Betting On Bitcoin
  • 15 hours ‘Data Is King’: The Oil Industry’s Next Most Valuable Resource
  • 16 hours Google Invests $300 Million To Combat Fake News
  • 17 hours Zuckerberg Dodges A Bullet As Facebook Loses Billions
  • 18 hours Tesla Tumbles As Investors Lose Patience
  • 19 hours Are Alt-Coins On The Verge Of A Break Out?
  • 21 hours What Should Gold Investors Expect From The New Fed Chair?
  • 22 hours Who Will Pay For Trump's $60 Billion China Tariffs?
  • 2 days Vladimir Putin’s Mysterious Fortune
  • 2 days Cryptos Resist Social Media Crackdown
  • 2 days The Death Of Dodd-Frank
  • 2 days Bitcoin Bounces Back Ahead Of G20 Meeting
  • 2 days Trump's Trade War Nears Boiling Point
  • 2 days Will April Be A Turning Point For Precious Metals?
  • 2 days Economic Pressures Weigh On Banks And Borrowers
  • 2 days U.S. Political Uncertainty Keeps Stock Markets On Edge
  • 3 days Gold: The Religion Of Currency
  • 4 days Economists Polarized On Trump’s Tariff Plan
  • 5 days Why Are Investors Overlooking Gold Stocks?
  • 5 days The App That Democratized Trading Is Now Worth $5B
Is Barrick Gold Close To Finding A Bottom?

Is Barrick Gold Close To Finding A Bottom?

Barrick gold has been a…

Trump's Trade War Nears Boiling Point

Trump's Trade War Nears Boiling Point

Trump’s trade war appears to…

Snap Shares Tank Over ‘Slap Rihanna’ Campaign

Snap Shares Tank Over ‘Slap Rihanna’ Campaign

Snapchat’s share prices tumbled after…

Clive Maund

Clive Maund

Mr. Maund is an independent analyst who receives no compensation of any kind from any groups, individuals or corporations mentioned in his reports.

More Info

Gold Market Update

Originally published June 9th, 2013.

We are very close to or at a major bottom in gold and silver now, regardless of the potential for another short term downleg. This is made plain by the charts we are going to look at in this update. COTs and sentiment are now at extraordinary extremes not seen in the entire history of this bullmarket. This means that when the turn really comes we are likely to see a scorching rally which will be driven by massive short covering that will leave most investors standing, mouths agape.

On its 6-month chart we can see gold starting to be pressured lower again by its falling 50-day moving average, after a feeble recovery rally. Although it looks set to continue lower short-term probably into the support approaching its April panic lows, for reasons that we will come to later there is considered to be a fair chance that these lows will hold, or that if the price does break to new lows, it won't be by much before it reverses to the upside after setting a bear trap. The position of the MACD indicator, which has largely neutralized following oversold extremes, certainly allows for further downside, but at the same time gold's overall oversold condition is shown by the large gap that has opened up between the price and its 50-day moving average, and the 200-day moving average quite far above.

Gold 6-Month Chart

Gold's 20-year chart is interesting as it shows that a very long-term trendline is in play that is supporting the price at about the current level. Given the now strongly bullish COTs and sentiment there is considered to be a fair chance that this trendline will cause the price to reverse to the upside very soon now. If it breaks down from this uptrend it will open up the risk of a drop to the strong support in the $1000 area, but this is considered unlikely because of the aforementioned positive COTs and sentiment.

Gold 20-Year Chart

Gold's COT structure is little changed from last week. It is still strongly bullish with the Commercials having scaled back their short positions to a very low level, and Large Spec long positions having dropped back to a low level, while Small Specs have given up on the game altogether, which is a very positive sign. The slight uptick in Commercials' short positions last week is thought to be evidence of some position taking ahead of Friday's drop.

Gold COT Chart

The long-term COT chart looks very bullish indeed, with the Commercials having scaled back their short positions to the lowest level since the bullmarket began. Meanwhile Large Spec long positions have been reduced to their lowest level since 2008, indicating general despondency typical of a market bottom, and Small Specs have abandoned all hope, with their long positions disappearing altogether. This all pervasive negativity on the part of traders is the stuff of which important bottoms are made.

Gold COT Chart 2
Chart courtesy of www.sentimentrader.com

Meanwhile, Hulbert Gold Sentiment is in the basement, which is bullish!

Hulbert Gold Sentiment Chart
Chart courtesy of www.sentimentrader.com

The public have a low opinion of gold, another positive, as the time to buy is when most investors aren't interested!

Gold Public Opinion Chart
Chart courtesy of www.sentimentrader.com

The Precious Metals assets of the Rydex traders are at a very low level, which is a good sign, as they make a science of being wrong!

Rydex Precious Metals Assets Chart
Chart courtesy of www.sentimentrader.com

The seasonal chart for gold shown below reveals that while June is overall a negative month, the best time of the year seasonally speaking is just around the corner, with August and September being the best months. The script this year could therefore involve a selloff over the short-term into a final bottom, and then a reversal and big rally in the ensuing months.

Gold Seasonality Chart
Chart courtesy of www.sentimentrader.com

The dollar's rally reversed as predicted in the last update. After forming a choppy top area, it went into a steep decline which stopped abruptly right at important support near to its 200-day moving average on Thursday. Given the magnitude of the dollar's decline it is surprising that gold did not fare better, and this does not bode well for gold short-term, as the dollar now looks set to bounce back, although longer-term the outlook for it is bleak.

US Dollar Index 6-Month Chart

While we can all chortle with mirth at Japan's laughable attempt to imitate the Fed by printing money recklessly - laughable because they do not have the comfy cushion of being in possession of a global reserve currency - and how they drove straight at a brick wall leading to the distinctive sound of rapidly crumpling metal. What happened in Japan to the Yen and then to the stockmarket should serve as a dire warning to the Fed of what could happen if it continues to abuse the dollar relentlessly as it has been doing. The dollar chart now looks very scary, and although it does look set to bounce back short-term from oversold, which could clobber gold and silver one last time, what looks likely to happen is that it will rally up to form the Right Shoulder of the potential Head-and-Shoulders top shown on our 6-month chart for the dollar index below. Use this as your guide for when to reverse positions - dump the dollar when it tops out at the prospective Right Shoulder high, we'll offload our 'insurance' PM sector Puts for a nice profit and we'll go aggressively long the PM sector across the board - ETFs, better producing gold and silver miners with low or no debt, and Calls. Note here that the dollar rally up to mark out the Right Shoulder of our prospective H&S top may not get as far as shown on our chart - we could see a stunted Right Shoulder. COTs for the dollar are still extremely bearish, with Small Specs being insanely bullish, which is a huge negative.

US Dollar COT Chart
Chart courtesy of www.sentimentrader.com

US dollar Public Opinion has moderated from its earlier positive extreme which also called for the recent drop. This moderation has created room for the expected short-term relief rally to develop.

US Dollar Public Opinion Chart
Chart courtesy of www.sentimentrader.com

Although obviously cheap compared to last year it may still be a little early to buy PM stocks aggressively, which could easily fall victim to another short-term downleg, for reasons that are made plain by the 8-year chart for the HUI index shown below. This index broke down from a Head-and-Shoulders top earlier this year, whose minimum downside target on an equal move basis is about 210. If gold and silver drop short-term in response to a dollar bounce, they could get clobbered again, particularly as the oversold condition has unwound as is shown by the MACD indicator at the bottom of the chart having neutralized. There is some risk of them plummeting back to the vicinity of their 2008 lows. One big fundamental reason for the dreadful performance of mining stocks relative to gold is the huge increase in mining costs. However, when the turn does come a dramatic recovery is to be expected that will likely be amplified by short covering.

HUI Index 8-Year Chart

While mining stocks are vulnerable to further short-term losses, there is plenty of evidence that they are close to putting in a major bottom. This includes of course the positive indications that we have already looked at above for gold and silver, but also various indications that the sector is way oversold already and approaching extremes that call for a reversion to the mean.

One powerful indication that the entire sector is close to a reversal is the chart below showing the ratio of the HUI index to gold. When this is at a very low level as now it shows over pessimism - when investors are scared and very negative towards the sector they favor bullion over stocks, and the more that this is the case, the more bullish it is. The situation is already really extreme, with this ratio already way below its low readings at the depths of the 2008 crash, and amazingly it is even approaching the dismal levels plumbed in late 2000 before the Precious Metals bullmarket even began. This is surely a sign that a bottom is close at hand.

HUI Index Over Gold 18-Year Chart

The recent rotten performance of the Precious Metals sector is made plain by the chart below showing the ratio of the HUI index to the S&P500 index over an 18-year timeframe. This chart shows that the PM sector outperformed for most of the time from late 2000 right through to 2011, only really going into reverse since the late 2011 peak. However, the dreadful performance of recent months has brought it down close to an important relative support level, where there is a strong probability that it will reverse to the upside, and thus outperform the broad market once again.

HUI Index over S&P500 Index 18-Year Chart

Conclusion: all of the indications are that a major PM sector reversal is imminent, but we might see one last down first, particularly by stocks. Any such drop will be viewed as throwing up a rare opportunity to buy the sector at ridiculously low prices.


Back to homepage

Leave a comment

Leave a comment

Sign Up For The Safehaven Newsletter