Positive Signs For PM Sector

I have read the work of variety of market participants, many of which have now become certain that Precious Metals sector has finally bottomed out. Personally, while I continue to remain long PMs like Silver with overwhelming capital in my fund, I am not as sure that the final low is in.Do not misunderstand me, there is nothing more that I would like then to see PMs prices recover and enter a new bull market. However, there is a difference between reality and wishing. Regardless, I do believe that we are overdue for a relief rally (at least) and here are some charts to show positive developments in the sector:

Chart 1: Frank Homles believes Gold is forming a double bottom

Gold Double BottomSource: US Global Investors

A well respected investor Frank Holmes, from US Global Investors, writes:

Gold strengthened $5.60 this week, with its price increasing $48.40 per ounce so far this year. As the chart above shows, the yellow metal continues to form its technical double bottom and is now breaking away from the 50-day moving average. Normally, as U.S. economic prospects improve, gold retreats. However, so far this year the negative correlation between the dollar and gold is at the lowest since October of last year, as purchases of bullion coins, bars and jewelry boost demand. As of the beginning of the week, the U.S. Mint sold 67,000 ounces, far more than in all of December.

Personally, I do not think Gold is forming a double bottom pattern. I believe Gold’s strong support exists somewhere lower near $1000 per ounce, as described and written about in previous posts. However, sentiment has been incredibly pessimistic as described earlier this month and there is plenty of reasons why precious metals could rally further as a relief from oversold conditions in late 2013. A break above the 50 day moving average is a positive development, from the near term perspective.

Chart 2: Hedge fund have been shaken out of Gold with a 2013 sell off

Gold COT

Source: Short Side of Long

Chart 2 shows that the downtrend line still remains in place for Gold since October 2012 and Gold is yet to break out, so to speak. With Gold selling off towards $1,200 per ounce in both June and December of 2013, hedge funds have pretty much been shaken out, as they reduced their exposure to levels not seen in a decade. From a contrary point of view, Gold could rally higher as hedge funds have plenty of room to build their positions towards higher levels (in other words, Gold is under owned) and the chart shows that some have already started to do so. Finally, gross short positions still remain elevated and might be the required fuel to drive prices higher through a process known as a short squeeze.

Chart 3: Market participants have sold out of various Gold ETFs

GLD Physical Holdings

Source: Short Side of Long

Hedge funds, retail investment community and other speculators have also been selling their physical Gold holdings in a hurry through the whole of 2013. The fire sale has been quite rapid and while it might continue for awhile longer, there is also a possibility for it to stop and reverse (at least for awhile). Investors might return back to the ETF, if and when the technical break out in Gold occurs as seen in Chart 3. Can Gold break above its downtrend line and re-spark retail investor interest?

Chart 4: Gold miners remain near support, with improving momentum

Gold Miners vs 200 MA

Source: Short Side of Long

Finally, there are also positive developments by the mining companies within the sector too. The recent lower low in the HUI Gold Bugs Index was not confirmed by Gold or Silver. Prices edged very close to the support of 170 and seems to be reversing (possible bear trap?) as the momentum is showing a bullish divergence usually witnessed near bear market bottoms.

Furthermore, Gold miners are starting to outperform Gold itself, as can be seen in Chart 5. Time will tell whether this trend will be sustained, like it was from 2000 until 2004, but even the short term outperformance is a welcomed improved during relief rallies.

Chart 5: Gold Mining companies have started to outperform Gold prices

Gold vs Gold Miners Ratio

Source: Short Side of Long