It's often said that commodity
shares should lead the actual commodities. While this isn't always the case,
it often is at market turning points. Months back we noted the relative
weakness in Gold and Silver shares and deemed it a reason for caution. It
took more than a few weeks but our caution was vindicated as Gold and Silver
shares fell more than 20% in April and May. Now we are seeing the reverse which
should delight gold bugs and gold bulls alike.
In this weekly chart we show
GDX (large caps), GDXJ (large juniors) and GLD (Gold). Note how the shares
peaked at the beginning of April while Gold continued higher for the next
three weeks. In the past two weeks, Gold has closed lower but the gold shares
did not. The gold shares led the market down at the most recent top and now
they are sporting a positive divergence that comes at a time when they are
bottoming. That makes the divergence more meaningful.
Moving along, we see the same
situation in the Silver sector. Our chart below shows SIL (large Silver
miners) and SLV (Silver). SIL peaked the first week of April while Silver
zoomed higher for another three weeks. Now we have the reverse. SIL closed at
a weekly low two weeks ago and has since gained while Silver closed at a new
low last week and this week.
In recent weeks we noted that
the shares were oversold, underowned and due for a bottom. It has taken a few
weeks but now it has become more apparent with the positive divergence from
the metals. Divergences as such (especially on a weekly scale) tend to come
at important tops and bottoms. Furthermore, the market is back in a risk-on
mode as risk assets recover. When Bonds rally and risk declines, Gold holds
up very well but the stocks do not. Now we are seeing the opposite, which
benefits the shares against the metals.
We do not expect the shares to
race back to new highs quickly but more important, a significant bottom is
likely in and the risk in the shares is much smaller than only a few months
ago.
Good Luck!
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