The precious metals sector, after failing to breakdown has enjoyed a strong
rally in recent weeks. Gold, Silver and junior gold miners (GDXJ) have reached
their 200-day moving averages with senior miners (GDX) close behind. While
this is a positive development it does not yet signal that the sector is embarking
on a new bull market trend. There are a few things to keep an eye on over the
days and weeks to come that can help us determine if a new bull market is taking
shape.
While the 200-day moving average (dma) is important, it is not as significant
as the 400-dma moving average which does a better job of defining bull and
bear markets. Take a look at the chart below and note how the 400-dma has capped
the best bear rallies of the past three years. As bulls, we need to see precious
metals rally past the 200-dma and reach the 400-dma. Breaking above the 400-dma
would confirm a new bull market has begun but merely reaching the 400-dma would
be a strong first step.
Gold has gained strength against equities but has yet to fully break resistance
and make a new 52-week high. The Gold/NYSE ratio charted below is consolidating
at key trendline resistance and the 400-day moving average. If the stock market
begins another leg lower in the weeks or months ahead will Gold go with it
or will it buck the trend? The answer to that question is critical to Gold's
medium term prospects.
The gold stocks bear analog chart makes a strong case that the mining sector
may have reached its low. The current bear market is nearly as long as the
1996 to 2000 bear and in terms of just about every index (BGMI, XAU, GDM) is
worse in price. One should also keep in mind that the miners bottomed five
months before Gold at the end of that bear.
The precious metals complex has enjoyed a strong rebound to 200-day moving
averages but could be due for a pause or correction. We will be watching closely
to see if the sector can digest recent gains and consolidate around resistance.
The days and weeks to come figure to be very interesting. If the miners have
hit a bottom then they should surpass their 200-day moving averages and show
increased relative strength within the next month.
