Chart 1: Gold mining index is approaching a major technical support
As the precious metals bear market continues, it is important to have a look at various components of the overall sector and not just Gold itself. One of these sub-sectors are Gold Miners, which tend to have a strong love / hate relationship with investors (investors love miners when they are outperforming in a bull and hate them when they are under-performing in a bear).
The chart above shows that the HUI Gold Bugs Index is fast approaching a major technical support at 170 points. This area holds a high level of importance for investors and traders dating back to at least 2004, if not longer. Considering that the index has traded very far away from its 200 day moving average for the whole of 2013 (in other words, very oversold) and that sentiment is incredibly bearish (see paragraph below*), by the time the support is reached there should be an above average probability of some kind of a low being formed at this area.
*According to recent BCA Research, it is difficult to see precious metals accelerating on the downside in the medium term, despite Fed’s announcement of tapering. The firm goes on to state that the overall sector is experiencing “lopsidedly bearish” with the four-week moving average of bullish sentiment at a twelve-year low, net speculative long positioning at a nine-year low, and ETF holdings at a three-year low. BCA believes a rebound is much more likely in the short to medium term.
Finally, if you haven’t already watched a technical video summary of precious metals, please click here. The author in the video goes on to show that the current bear market in Gold Miners is quite identical to some of the most oversold bear markets in the history of the index. In other words, a major bottom and a rebound could be much closer then majority of the Wall Street think, unless this is historical anomaly (rarely do we see those). This view is also confirmed by my own personal the chart below, showing how the current 12 month rolling period is one of the most oversold for the HUI Gold Bugs Index in almost 3 decades.
Chart 2: One of worst annual performances for the Gold HUI Index