is now such an overwhelming array of technical evidence that
the Precious Metals sector is forming a major bottom, that
by the end of reading this update you will, or should unless
you are stupid, understand why we now have no choice
but to turn strongly and unequivocally bullish on the sector.
Up until now we have had some reservations, but these have
been swept away by the latest truly extraordinary data.
You may recall that in the last update posted on the 10th
we called for a drop. As you won’t need reminding, we got
it. On its 7-month chart we can see that gold sliced straight
through support at its early January bull hammer low and then
dropped steeply into last Wednesday – Thursday, where a high
volume selling climax occurred at a parallel trendline target.
Gold is now quite deeply oversold, with many oscillators at
extreme readings. This 7-month chart cannot provide the big
picture of what is going on, only recent detail, so let’s
now move on to the longer-term charts.
2-year chart for gold is very useful as it enables us to examine
the large trading range that has formed from the August –
September 2011 highs in detail. After the initial drop from
those highs we can see that gold settled into a horizontal
trading range between clearly defined support and resistance
at its upper and lower boundaries. Since the boundaries of
this trading range have been tested on several occasions in
both directions, resulting in significant reversals, they
are clearly are great technical importance, and a breakout
from this range will thus be an important technical event
that can be expected to lead to a major move. For a variety
of compelling reasons which we will soon come to, gold is
expected to reverse to the upside from its current position
near the lower boundary of the trading range and go on to
break out upside from it. Here we should note that although
a powerful new uptrend is expected to develop soon from here,
we should not be surprised to see some backing and filling
over the short to medium-term above the support, that may
involve gold dropping a little further to about $1530. This
is hardly surprising given that many sector participants are
shell-shocked after the latest drop, so that some are in the
frame of mind where they will sell for what they can get.
Failure of the support at $1500 is viewed as highly unlikely
given the current technical readings – if it happened it would
have dire implications for just about everything, as it would
imply that another 2008 style deflationary implosion was on
the horizon, and it is considered unlikely that the money
pumpers will permit that, although one day they may no longer
have any choice in the matter. Now let’s look at the really
big picture on gold’s long-term chart.
the 7-year chart we can see that after its latest drop gold
has arrived not just at, or close to, the lower boundary of
its recent large trading range, but also at a parallel trendline
target. It is now in the zone that we had earlier defined
as being an excellent point to buy ahead of the start of the
next major uptrend. This is an excellent point for it to turn
up to start the breakout drive marking the birth of the next
major uptrend, and as we will now see, all the technical indications
are that it is about to do just that.
latest COT chart for gold is at its most bullish for over
a year, and this chart, which is up to date as of last
Tuesday’s close, does not even factor in Wednesday’s big drop,
so readings now can be assumed to be even more favorable.
This is by far the most reliable indicator in our tool bag
– whenever we have gone against it we have lived to regret
it - and it was partly the then still bearish silver COT which
enabled us to predict the latest plunge in both gold and silver
before it started. After this drop Commercial short and Large
Spec long positions (for Commercial read Smart and for Large
Spec read dumb) have fallen dramatically and this COT chart
is now viewed as strongly bullish for gold.
we move on to look at a range of sentiment indicators which
provide a raft of evidence that gold is either at or very
close to a major bottom. We start with the Hulbert Gold Sentiment
Index, which shows that sentiment is at rock bottom, there
is only room for it to drop a whisker more. This indicator
shows that everybody and all their friends and relatives are
bearish on gold, which means that there is almost nobody left
to turn bearish on the friendless metal. So guess what happens
to the price when people start changing their minds? – that’s
it – you’ve got it!
courtesy of www.sentimentrader.com
gold public opinion index is at even more extreme low levels,
being at its lowest reading by a country mile since at least
the end of 2008. This demonstrates that the sheep are all
up at one end of the field, the bearish end – and we all know
what happens to them.
courtesy of www.sentimentrader.com
Rydex have reduced their Precious Metal holdings to a very
low level, as we can see on the following chart, which also
shows that they are dumb as a door stopper when it comes to
timing Precious Metals purchases. We can therefore take their
low interest at this time to be another positive indication.
courtesy of www.sentimentrader.com
does the all-important dollar fit into the picture at this
time? Let's take a look. You may recall that we were positive
on the dollar in the last update, despite the large completing
Head-and-Shoulders top evident on its chart, because of the
then bullish dollar COTs. As we can see on the 6-month chart
for the dollar index below, it has enjoyed a significant rally
this month, but has now arrived at a zone of strong resistance
in an overbought state.
on its longer-term 18-month chart the dollar still looks like
it is completing a Head-and-Shoulders top, and this is made
more likely by the fact that the dollar COTs, which were distinctly
bullish, are now moderating, opening up downside potential
again. All the data set out above for gold certainly suggests
that the likelihood is high that the dollar will now turn
tail and drop hard.
so if the outlook for gold is now so rosy, what about gold
and silver stocks? Precious Metals stocks have taken a terrible
beating over the past 17 months, and must be about the most
unloved sector on the market, which is very strange given
that gold really hasn’t fallen all that much. Just how unloved
stocks are relative to bullion can be seen on the 20-year
chart for the XAU large Precious Metal stock index over gold
shown below. On this chart we can see that this ratio has
sunk almost to its lowest ever level, on a par with the 2008
panic trough – and after that a big rally in stocks ensued,
as we can see on the sub-chart for the XAU index at the bottom
of this chart. The key point to grasp when looking at this
chart is that when investors are pessimistic towards the PM
sector they favor bullion over stocks, because they believe
it to be safer, which of course it is, and the ratio sinks,
but when their pessimism is driven to extremes it is also
a very bullish sign for the sector, as there comes a point
when the tide turns and a new cyclical uptrend emerges. Quite
clearly from looking at this chart, there couldn’t be a much
better time for the pendulum to swing in favor of stocks,
and that of course implies the birth of a new sector uptrend.
how bearish are investors towards gold stocks? – extremely
bearish, and the following chart of the Gold Miners Bullish
% Index makes this abundantly clear. It shows that with only
6.6% of investors bullishly disposed towards gold stocks,
there is almost no-one left to turn bearish. When this happens,
you are at or very close to a bottom. Could it go lower? –
well, it dropped to zero at its lowest in late 2008, but that
would only happen again if we see a deflationary implosion,
and all the indications for gold that we have looked at above
are bullish, so that either the implosion isn’t going to happen,
or this time, if it does, gold and silver are going to going
contra-cyclical and go up anyway.
is one final crucial piece that we have to fit into our puzzle,
and that is to reconcile the inconsistency of the apparent
Head-and-Shoulders top that appears to be completing in gold
stocks indices. Observation of this formation has made us
bearish, but too bearish, on PM stocks in the recent past.
A breakdown from a Head-and-Shoulders top and further plunge
by Precious Metals stocks in the near future does not fit
with the strongly bullish indications for gold that we have
reviewed in this update today. So what we are going to do
now is to take a second look at this apparent H&S top but
this time using the proxy Market Vectors Gold Miners (GDX)
on which we can study the volume pattern. For a true Head-and-Shoulders
top should be accompanied by heavy volume as the index rises
up towards the Left Shoulder high of the pattern, somewhat
lighter volume as it rises up towards the high point of the
Head of the pattern, and light volume as it rises up towards
the Right Shoulder high.
the 6-year chart for the Market Vectors Gold Miners above
we can see that while volume was high on the rise into the
Left shoulder of the Head-and-Shoulders top, and it was much
lighter on the rise into the Head, it was high again on the
rise into the Right Shoulder of the pattern, which is why
the Accum-Distrib line shown on the chart rose to new highs.
This is not consistent with a true Head-and-Shoulders top,
where volume should be light on the rise into the Right Shoulder.
It is therefore reasonable to conclude that the pattern is
a phoney, which is consistent with the strongly bullish indications
for gold at this time. While it is true that the latest high
volume plunge has driven the Accum-Distrib line sharply lower,
this looks like a final capitulative selloff.
So, in conclusion, while it certainly takes a lot of courage
to buy gold and silver and especially Precious Metals stocks
here, especially if you have been beaten up in the recent
past, according to everything we have reviewed here, that
is precisely what you should be doing.