We've recently written quite a bit about the current technical situation in
precious metals as well as the current bear market compared to past bear markets.
Thus we've neglected sentiment somewhat. This is a good time to examine sentiment
as the sector appears to be bottoming or trying to emerge from a bottom.
The first chart shows the speculative position (for Gold & Silver combined)
as a percentage of open interest. The black is a price index comprised of Gold
and Silver. At the June low speculators were only 4.6% long as a percentage
of open interest. That marked a 12 year low. It is currently 11% and was as
high as 52.8% in 2012.
Before Christmas, public opinion on Silver was near 20% bulls. That was in
the bottom 3% of all readings in the past 20 years. At the same time, the speculative
position in Silver was in the bottom 8% of all readings in the past 20 years.
(Source: SentimenTrader.com)
This chart from Tiho Brkan, shows
the Central Fund of Canada and its premium or discount to NAV. At the June
low the discount was 7%. Shortly thereafter, the discount surpassed 8% though
CEF did not make a low in price. That was the highest discount to NAV in 12
years! The current discount is 5%.
Assets in the Rydex Precious Metals Fund have evaporated from $370M to $58M.
I don't have the history handy but I believe this is near a ten year low. Even
more striking is the decline in assets as a percentage of all sectors. That
is down to 4.7% which is well below the 2008-2012 lows.
Sticking with precious metals stocks we see that short interest is very high
in GDX. This isn't necessarily bullish. The shorts have been correct for more
than a year. However, short interest surged in November and December and the
stocks failed to make new lows in December. If short interest remains high
in January and the market continues to firm then its bullish. (Source: Schaeffers
Research)
Just like history, sentiment does not pick or ensure a bottom. The best recipe
is to wait for a combination of extreme negative sentiment and very strong
technical support. We were hoping the precious metals complex would plunge
further to that very strong technical support noted in recent editorials. It
could still happen. However, we have to listen to the market and its price
action. The gold and silver stocks failed to make new lows in December. Last
week Gold and Silver tried to make new lows and failed.
If precious metals fail to make new lows when sentiment indicators are at
decade extremes then how could they make new lows in the near future? There
are some speculative longs in the market (11% of open interest) who could drive
it lower temporarily if metals don't rally soon. As we've said, any selloff
is likely to be final and would produce a strong rebound. If that doesn't happen
then the market could continue a slow, grinding saucer type of bottom. The
longer this drags out then the more likely that is. The age and depth of this
bear, extreme negative sentiment, lack of new lows and recent relative strength
in the shares lead us to err on the bullish side.
If you'd be interested in learning about the companies poised
to rocket out of this bottom then we invite
you to learn more about our service.
