• 5 hours The Cannabis Culling Has Wall Street Disappointed
  • 11 hours Vigilante Offers $100,000 Bounty To Hack Banks
  • 1 day The Dairy Industry Is Dying
  • 1 day The Most Impressive Electric Vehicle Of The Year
  • 2 days Gold Miners Are Having A Stellar Second Half
  • 3 days How 3D Printing Is Turning Each And Every Industry On Its Head
  • 3 days Is The $3.5 Trillion Healthcare Industry About To Get Much More Transparent?
  • 4 days Gamblers Are Betting Big On Trump’s Impeachment
  • 5 days Even Banks Can't Answer Aramco's Trillion Dollar Question
  • 5 days Will Bezos Buy The Seattle Seahawks?
  • 6 days 6 Tech Trends Transforming The Travel Industry
  • 6 days Ousted Uber CEO Cashes Out $500 Million In Stock
  • 6 days Trump Prepares For Another Key Tariff Decision
  • 7 days The Free Money Bubble Is About To Burst
  • 7 days The Crushing Reality Of Poverty In America
  • 7 days Should You Buy Into The World’s Largest IPO?
  • 7 days The Infinite Possibilities Of Cosmic Energy
  • 8 days Analysts Link Walking To Economic Growth
  • 9 days Will Japan Turn Its Back On The Aramco IPO?
  • 10 days Global Debt Soars To $188 Trillion
Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

  1. Home
  2. Markets
  3. Other

An Analog for the Gold Stocks Correction

The gold stocks bounced strongly today after the February jobs report confirmed the Federal Reserve will hike interest rates next week. While precious metals rallied strongly following the previous two hikes, I’m not so sure today marks the start of a big rebound. For one, the Federal Reserve could hike rates again in July. Second and more important, the technical setup argues for more back and forth action in the weeks and months ahead. While the current price action in the gold stocks is different from that in the previous cyclical bull markets, we do think we have found one viable comparison for the current correction.

Although the gold stocks may rally for a few weeks in the short-term, I see them testing the December lows or close to those lows before retesting their February peaks. If this occurs and the correction that began last summer remains in effect, then what does that mean for the larger picture?

Put simply, the gold stocks formed a historic low in January 2016 and are undergoing a sizeable correction (in price and time) to the record advance that took place in the first half of 2016. A long and deep wave 2 correction, though not typical has a few historical examples.

In the chart below we plot the housing and banks sectors, which endured a sizeable wave 2 correction (in price and time) in 2010-2011 before exploding higher from late 2011 to early 2013.

Housing and Banks Weekly Charts

These two sectors share several key similarities to the gold stocks at present. They endured a devastating bear market of more than 80%. (It was the worst bear market in over 80 years). They rebounded strongly from their historic 2009 bottoms. In particular, the banks surged 250% in 12 months. Then both sectors corrected 44% in a correction that lasted 17 months and longer than the initial rebound. Finally, note that the banks and housing sectors experienced a technical breakdown (C leg) in late 2011 that effectively served as a massive bear trap and a tremendous buying opportunity.

With respect to the gold stocks, the point is additional technical weakness and a breach of support will likely be a great buying opportunity and not a sell signal. Gold stocks in January 2016 were the cheapest they had ever been. Going forward over the next few months, the closer they trade to those levels, the better buying opportunity it is. Given the historical context, one should not overreact if the miners lose their 400-day moving averages or temporarily break their December lows. Due to the gold stocks being only 15 months removed from such a historic bottom, there simply aren’t enough new sellers to drive the sector that much lower.

VanEck Vectors Gold Miners ETF and Junior Gold Miners ETF Daily Charts

The gold stocks appear to be following a rare but viable example of a lengthy bull market correction. Unless they can rally back to their February highs soon then the analog to the housing and banks sectors remain in play. That aligns with our outlook of the spring and summer being a grind. As we noted last week, the way to play this setup is to buy weakness and avoid chasing strength. We are actively looking for bargains that we can buy and hold through this period into the next big move higher.

 


For professional guidance in riding this new bull market, consider learning more about our premium service including our current favorite junior miners.

 

Back to homepage

Leave a comment

Leave a comment