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Precious Metals Get a Reprieve

The precious metals sector has held recent lows and a rebound is underway. Gold held $1080/oz for three straight weeks and has pushed as high as $1126/oz this week. The gold miners (GDX and GDXJ) surged the first half of the week and Silver has also gained. We believe that this move is more likely to be a relief rally before Gold ultimately tests $1000/oz rather than the start of a new bull market.

Gold's weekly candle chart is posted below and at the bottom it includes the net speculative position in Gold. Over the past two weeks Gold's net speculative position was the lowest in 14 years! Gold pushed through $1100/oz this week after forming hammers during each of the prior three weeks. The near term upside target remains $1140-$1150/oz while near term support is $1100/oz.

Spot Gold Weekly Chart

The gold miners surged at the start of the week. Through Wednesday GDX gained 14% while GDXJ gained 17%. Despite Thursday's sharp reversal, the miners have further near term upside potential. If this rebound has legs then look for GDXJ to test $23-$24 and GDX to test $17.

Market Vectors Junior Gold Miners Daily Chart

In recent weeks and months we have posted a handful of charts showing how cheap and depressed the gold miners are. We have a new one to share. Using the Barron's Gold Mining Index (BGMI) we see that gold stocks relative to the S&P 500 (as of last week) were trading within 2% of the all-time low in 2000. This could be a major double bottom.

Gold Stocks versus S&P500 Since 1940

Though we believe the bear market is not quite over as we think Gold could test $1000/oz, there is an important distinction to make. As of last week the gold stocks to Gold ratio was also trading at all time lows. The gold stocks are not only extremely oversold but historically oversold. The BGMI as of last week was trading at a 13-year low and at the same level as 42 years ago! Simply put, Gold is nowhere near as oversold as the gold mining stocks. Therefore it is possible the gold stocks could bottom before Gold. Recall, this happened during the 2000-2001 lows.

That being said, we will keep all scenarios open and trade accordingly. Be aware of the risk of a Gold reversal at $1140 to $1150 and the risk of a future test $1000/oz. At the same time, consider the historic oversold condition in the gold stocks. I would not be surprised to see the juniors (GDXJ, GLDX) start outperforming Gold before Gold bottoms.

 


As we navigate the end of this bear market, consider learning more about our premium service including our favorite junior miners which we expect to outperform in the second half of 2015.

 

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