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.
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.
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.
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.
