Two months ago the precious metals complex became extremely oversold and ripe for a rebound. Two months later and the overbought condition and bearish sentiment has been alleviated to some degree. Sadly for bulls, Gold barely rebounded while both Silver and gold miners performed worse. The broad precious metals sector appears to be in position for a breakdown that could be a knockout blow to gold bulls and gold bugs.
The weekly candle chart of Gold and Silver is shown below. Gold failed to clear $1160 in August and failed to close above $1150 last week. Gold is already down $33 this week and threatening to break lower from a triangle consolidation. Meanwhile, Silver has tried to surpass $15.50 but has failed a handful times. It is threatening to close at a new weekly low. The metals broke support in the summer and are threatening to break to new lows after retesting resistance (former support). This is textbook stuff.
The prognosis is the same for the miners. The daily bar charts for GDXJ and GDX are below. While the miners have held support, they have failed to generate anything during the rebound in Gold. Both GDXJ and GDX fell below their 50-day moving averages on Monday and have failed to recapture them. After Wednesday's strength the miners failed again at their 50-day moving averages, leaving a bearish reversal and very little breathing room.
Another reason to be concerned is bearish sentiment has been unwound. From a bird's eye view sentiment is certainly very bearish and that supports the inevitable sustained rebound. However, near term indicators such as put-call ratios, speculative positioning and discounts to net asset value do not indicate extremes. While there are a fair amount of speculative shorts in the metals, there are also some speculative longs left. In other words, there are still potential sellers out there who can drive the price lower. These longs need to liquidate before true capitulation can been reached.
In the days and weeks ahead, investors and traders need to be vigilant and focus on taking advantage of the volatility. The precious metals sector is threatening to break lower. Shorts should use stops while longs should remain patient and wait for this potential breakdown to run its course. Personally, I'm hoping to accumulate my favorite junior miners as Gold nears major support at $1000 and as sentiment and technical indicators reach extremes.
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