Canvas Secondary

Major Bottom in Precious Metals Could Occur This Week

Normally catching a bottom is not difficult. Bottoms tend to occur instantly while market tops form during a process. Yet, I’ve found that bottoms of long-term significance do not occur instantly. Like tops, they can take time to develop. For example, think about late 2008 to early 2009. Commodities hit their price low in December but the bottoming process began in October and wasn’t complete until May. Emerging markets hit their low in November but the process began in October and ended in March. Returning to the present, we see that Gold and Silver look set to retest their late December lows. Our work leads us to argue that the metals will successfully retest their lows and soon emerge from what in the future will be considered a major bottom in-line with 2008, 2005 and 2001.

We begin with a daily chart of Gold which shows its daily closing prices and a volatility indicator. The percentage figure refers to the percent bullish reading from the daily sentiment index. As we noted recently, each bottom in Gold (except 2008) has come during a period of low and declining volatility. Volatility is currently at a 9-month low while only 7% of traders are bullish on Gold.

Next, let’s take a look at the current Commitment of Traders Report (COT) for Gold which shows the commercial short position and open interest at the bottom. The current commercial short position has reached a 3-year low while open interest recently touched a two and a half year low.

Moving to Silver, we see the metal is nearing significant support at $27. Silver closed at $28.93 and has a bit of room to fall before testing $27 and the 600-day moving average, which has been an important pivot point since late 2008. The current daily sentiment index is 16%. We think, with another day or two of weakness in Silver, the daily sentiment index would decline to single digits. We also want to note that $26 is the 50% retracement of the entire bull market.

Silver, unlike Gold, has seen more interest recently as open interest has increased since late last year. However, open interest would have to rise 40% to reach the old high. Commercial traders are net short 17.9K contracts, which is a within a whisker of the 10-year low which was reached at the end of last December.

We remain encouraged that a bottom is developing in the mining equities. Below we show a weekly chart of GDX. Last week GDX bounced from $41, which is the 50% retracement from the 2008 low to 2011 high. $41 also marks the strongest pivot point since $52. Furthermore, GDX’s volume was very close to a 3-year high. Note how strong volume has market past bottoms.

Breadth indicators suggest the gold stocks are near a major bottom. The chart below is from SentimenTrader.com. The McClellan Summation index is near levels last seen at bottoms in 2008 and 2006. The bottom row shows the percentage of stocks in the sector that closed above their 200-day moving average. The figure has been at zero percent for more than a month. The last time that happened? 2008.

The next chart, also from SentimenTrader.com, shows the assets in the Rydex Precious Metals Fund. Since the late 2010 peak, the fund has dropped by 40% while the assets in the fund have declined by 70%! Interestingly, the assets in the fund declined by 70% in 2008. The difference is the fund’s price declined by 73%. In other words, we are seeing the same amount of outflows as in 2008 yet the market has declined by 40% and not 73%.

While technical analysis and sentiment indicators make a convincing case that a major bottom is near, it is important to note the fundamental considerations which support our thesis. In recent editorials we’ve noted the trend of weakening data in the US. Obviously, should it continue into the summer, then it would raise the odds of Fed action. Shifting east, Europe is headed for a recession and monetization is badly needed first to prevent debt contagion and second to prevent economic contagion. Germany, the lone hold out against monetization, indicated last week it might budge a little bit. Continuing eastward, China cut the reserve ratio for its banks and is likely to do so again reports the Wall Street Journal. Also, India and Australia recently cut interest rates.

Consider these emerging fundamentals and then consider our technical analysis. Technicals always lead fundamentals and markets tend to look six to nine months into the future. We are not predicting imminent action from the Fed or imminent money printing from the ECB. However, we are noting the emerging positive developments which will drive precious metals higher into 2013. Policy from the east is shifting towards easy. Europe will have to embark on some major money printing likely by the end of the summer. Finally, continued weakness in US data along with the strength in US Bonds and the US Dollar will facilitate the environment for the next round of Fed action.

We anticipate a bottom this month to be followed by a higher low in July or August. The fundamentals should become more clear by the end of the summer and would drive the precious metals complex much higher during the seasonally strong period. Remember, major bottoms take some time to develop. We believe a bottom is at hand and that is why last week we began to scale into some positions. If you’d be interested in professional guidance then we invite you to learn more about our service.   

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

  • goldragon

    I have gotten “bottom is near” for almost months. Where is the bottom? This morming gold reach $1562. Maybe we are still far from it.

  • Drmikebarry

    oversold can become more oversold!!
    barmi

  • RUSS SMITH

    Hi!, Patrons Of The Daily Gold Et Al:

       It has been brougt to my attention by such advisories as Casey Research that we are entering the “Summer Doldrums” when everybody goes on vacation etc. plus the wedding season for Indian gold purchases is somtime in the fall and then comes the Chinese New Year both which apply added demands upon gold seasonally.  It would appear that perhaps during the doldrums that the Wild Card may involve large Central Bank purchases at any time?  Only Mr. Market knows exactly for sure & so again exercising our patience and persistance awaiting Mr. Market seems prudent again in my opinion.

    RUSS SMITH, CALIFORNIA
    resmith@wcisp.cm    

  • goldbug

    Buy puts and see what happens.  Another support for gold is at 1530s and if that breaks which very well might due to extreme weakness in metal that I haven’t seen to this extend in the last 8 years being into it can push this thing much lower.  Deflation is back on the table and cash rules.  Markets are moving lower and fear is back on so we can look for gold support but where will it be? 1530? 1480? 1430?  or 1000???  If the Fed doesn’t step in with QE3 soon we can have another crash with gold moving much much lower in the mid term.  I haven’t sold an ounce of physical and have bleeding miners where I have puts for a hedge.

  • goldragon

    From today’s gold and GDX behavior, I am afraid that gold might go to $1200, and GDX might go down to $30.

  • Derek

    All we need is for the FORCED selling in form of redemptions to stop.

  • Jimbo

    Most likely,  silver will break support.

  • http://pulse.yahoo.com/_HFB6DHNDVCVS67NOPUDRQQEX7M Keep Shorting

    All of these analysts should be ashamed of themselves for charging money for horrible advice.  Not just Jordan but anyone in the newsletter business.  The worst one being John Doody.

  • birdman

    Wow, and when it rises, maybe you can say that it’s going up………  

  • http://twitter.com/TheDailyGold Jordan Roy-Byrne

    Excuse me, where do you get the gall to judge our service when you aren’t even a subscriber? We are up 2% YTD while GDXJ is down 18%. Since the start of 2011, we are down 4% while GDXJ is down a whopping 47%. We have hedged ourselves with DUST and kept an ample cash position since last autumn. 

    It is hilarious…the feedback I get from subscribers is overwhelmingly positive while those who make comments here bitch and moan about our work when they aren’t even a subscriber! Wise up and get all the facts before you judge. 

  • Paul Bertan

    The bottom in silver will occur when the last of my retirement cash becomes available in September,

  • Greg

    In Jordan’s defence, as a subscriber, his service is one of the best ( having subscribed to a few) and I’m going to continue with it. Personally as a non trader, but an investor, I find the problem with many services is that they put too much emphasis on technical analysis, which I think is quite dangerous and should be used as a guide with a large grain of salt, mainly because the macro-economics are so much more powerful.  Also, many newsletters and gold bug websites are extremely biased and not balanced and at every leg down, we are just told to buy because it’s cheap and on the way up told to buy because Gold is going to the moon (James Turk is like a broken record!). The more cerebral services tell when to take profits and analyse the macro picture as well. Money printing goes into anything that’s attractive. That could be Gold, metal stocks, hard assets, commodities, the conventional stock market etc etc. and those things vary depending on timing and lots of other factors. Don’t think the gold stocks will be a buy until we get QE3 and that is unlikely to happen for political reasons until after or very close to the US presidential elections. Best website for the macro and an unbiased view is financialsense.com by some margin IMO.

  • Guest

    Operative word here is COULD! 

  • goldragon

    Here is what I want to talk about the bottom theory:
    If you want to invest you need to invest the “trend”, because trend is your friend.
    However, when trend is changed you need to get out. However, some newsletter writers or the investors themselves they made mistake, they see the price change and want to buy low, and thus they entered the position. Seeing the price dropping further they want to see the reverse. In this case there appears a bottom theory. This theory give people a false idea that the stock they bought will go up very soon. If it is a small correction, this theory works, but in a big correction like the current one with gold miners, the more bottom theory the worse.
    If you read carefully, you can find a lot of things from the bottom theory authors.
    Somebody mentioned “financial sense news”, Frank and Jim did a gold miner cheap program very early, thus I think their subscribers bought this down trend miners very early, thus you go there to listen, they give you a lot of bottom theory couple of weeks ago. Now the bottom of theirs is failed, thus now they use other theory to convince keep the gold shares.
    Bottom theory gives a false hope to investors, it is harmful theory!

  • goldragon

    Today GDX down 4%, GDXJ 8%, they are pretty near capitulation, the weak hands throw the baby with the bathwater.
    Hopefully, this makes a bottom. Like the author expected.
    However, miners have a lot of problems and the investors are not confident in investing their money! And also the market environment is not for a rally of miners. We are facing deflation cycle. Commodity is in a down turn. This is conflict with the so-called bottom theory.
    I am only a small guy. This is a very complex problem I could not explain.
    Anyway, before the trend changes, I will not long GDX or GDXJ.

  • goldragon

    Ned Smidts has an interview with Jim Puplava talking the summer doldrums.
    http://www.financialsense.com/financial-sense-newshour
    If we can not get a reverse before the summer like Ned is talking about, then we will go to HUI 150, or GDX 15, or even lower if gold miners sell off continue like today.
    Thus I prefer to this author’s opinion, i.e. we are very near the bottom, otherwise, HUI and GDX or GDXJ are going to zero very soon.

  • Sparrows345

    Central banks won’t be purchasing precious metals, in fact in Europe, they will be pressured to sell to finance their ongoing train wreck.

  • goldragon

    Bear market rally faded. This morning the bulls were so enthusiastically buying GDX for a big rally. However, these day-highs were used by bears to short. Now we got a very bearish candlestick. It looks like we still have long way to go down. Since we have two systems in breakpointtrades.com: BPGDM and Renko, as long as both have not triggered a buy signal for GDX, I think we’d better not to buy! The goodness of these systems have been proved. Following them is better to try other system and they can let you avoid emotion like today’s.
    Fundamentally, I think we are in a deflation environment, all commodities are in a big correction as shown by our CRB index, it is very difficult to see precious metal and gold stocks rally alone.
    There are usually three conditions for precious metal stocks to rally:
    1.                  Copper and other  commodities rally
    2.                  Gold and silver start to rally
    3.                  Fed stimulating comes.
    Currently we do not have any of three. Therefore we have a long way to go down, not go up.

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