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Tuesday 24 June 2014

Precious Metals - Definitely Maybe

Back on 22nd January I posted a chart showing that the falling channel on GDX from 54.18 had broken up and wondered aloud whether the precious metals bear market was bottoming out. That low was supported by very powerful positive divergence on the weekly RSI that I would normally associate with a major low. That low has held since and GDX has put in a higher high and (most likely) low since then, although that would also generally be the case on a bear flag of course, and that is always a possibility for a shallowly rising channel coming off a steep decline. If GDX can break over falling channel resistance from the high, currently in the 34 area, that should confirm a major low. GDX weekly chart:
Gold is also looking pretty decent as as a classical major low here, with a very nice looking double bottom setup that would target the 1700 area on a sustained break over 1434. Declining resistance from the second high of the double top has also broken, which is a bullish signal. Gold weekly chart:
Last but definitely not least is silver, where a monster falling wedge from the 2011 high finally broke up last week. I'm not concerned that this might be a bearish overthrow, not least because the downside target in the -25 area seems overambitious, but it wouldn't be unusual to see a retest that could take out the current low. On a sustained break over 25.12 I would have a double bottom target in the 32 area and any decent move back over 26/7 should confirm a major low in my view. As with gold and GDX there is strong positive divergence on the weekly RSI, but unlike GDX it was not cemented with a lower low, as neither gold nor silver made lower lows after the summer 2013 lows. Silver weekly chart:
So what are the pros and cons here?


1 - The consensus EW view is that there is more downside coming on gold and silver and the skilled EWers are generally worth listening to about these things, though I do remember with regret selling large silver positions in the low teens in early 2009 because EWI was convinced that there would be a last move down to six coming. Nonetheless the dedicated wealth-destroying team at EWI aren't worthy to shine the shoes of the EWers I read these days.

2 - Gold and silver did not make new lows after the Summer 2013 lows and that weakens the positive weekly RSI divergence on both, though new lows were not strictly necessary.

3 - All three of GDX, gold and silver have topping pattern targets that have not yet been reached. Those targets are 11 on GDX, though in my view any reversal pattern target that more than reverses the entire previous trend is a weak one so I would adjust this to the 2008 low at 15.34, the 1150 area on gold and the 14.5 area on silver. The more conservative versions of the gold and silver patterns have been made, but a final move for GDX to test the 2008 low, and for gold and silver to make the full targets can't yet be ruled out.


1 - My friend Alphahorn does have a count that has the lows possibly already made, though he too is waiting for more confirmation, and his precious metals longs of recent months have been poor performers relative to pretty much everything else. He's up over 15% on his model portfolio so far this year and called the move up from 1862 on SPX perfectly. I respect his view.

2 - It's hard to see precious metals getting much cheaper than this without driving much of the gold mining sector into serious unprofitability. As it is GDX almost made it to a retest of the 2008 lows and it's hard to see it going much lower.

Overall it's hard to say but I would say that I wouldn't expect any new lows from here to run much further, if they happen at all. The break up on silver last week suggests strongly that the short term rally on precious metals has further to run, and as and when that runs out of steam I'll be watching the next move to see whether it looks impulsive. As and when I think that a low is confirmed I'll call it.

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