Precious Metals are Oversold

I did an update on Precious Metals only a week ago and since then we’ve had a lot more of selling. While I remain fully hedged in Silver and also continue to hold my naked short positions in Gold, I believe that any further downside from the current levels will eventually see us reach extremely oversold conditions from which a major rally should occur. In coming weeks or months, depending on how long the selling exhaustion lasts, we could be approaching an all important buying opportunity.

Please understand that during the last leg of the bear market (I believe that is where we are), liquidation can last for awhile. I happen to think that majority of the sector will be under pressure until Gold re-tests its phycological level of $1000 per ounce (give or take some dollars). However, this isn’t necessary a prediction as I acknowledge that a low could now come at anytime as we are becoming very oversold. More and more indicators are flashing buy. Let us go through some of these extreme indicators:

Chart 1: Gold miners are oversold & have fallen 41% the last 3 months

Gold Miners Performance 

Source: Short Side of Long

 

Prices of various assets within the Precious Metal sector have gone down a lot over the last rolling quarter or 3 month period. Consider the chart above, which shows an extremely oversold conditions in Gold Mining shares, which are currently down 41% over the last 90 days. This is an astoundingly large drawdown, only second to the Global Financial Crisis of 2008.

In the same period Gold is down almost 13%, Silver is down almost 22%, Platinum is down over 17%, Silver Miners are also down over 41%, Gold Mining Juniors are down a whooping 46% and Silver Mining Juniors are down close to 45%. The carnage isn’t over a year or two, it is all in just three months. As already stated, these are some insane losses in a very short period of time, especially considering the bear market is over 3 years old!

 

Chart 2: Silver price is more then 20% below its 200 day moving average

Silver vs 200 MA 

Source: Short Side of Long

 

With prices so oversold, it shouldn’t be a surprise that indicators such as the one in Chart 2 are once again entering extreme reading. Sure, they’ve been even more extreme at times, but when an asset is more then 20% below its 20 day moving average (like Silver is today) you should pay attention. Who knows… it might go down to 30% by next week, but my point here is that a rebound and a mean reversion is in the cards very soon indeed (obviously let the selling run its course first).

Also consider the fact that Gold is trading 10% below its 200 day MA, which is quite a rare event. I think it has happened only 8 or so times over the last 25 years. Gold Miners find themselves more then 32% below its long term MAs. Finally, Gold Mining Juniors are in total wash out mode, as they trade almost 40% below the 200 day MA and over 27% below its shorter term 50 day MA. This is just getting ridiculously oversold now…

 

Chart 3: There are now 0% of Gold Miners trading above 50 & 200 MA

Gold Miners Breadth

 Source: SentimenTrader

 

One thing is clear here. Gold Mining shares, whether they are large caps or small caps, have been beaten down… no, I think I should say they have been smashed and bashed like Rocky during his famous fights. And this is also reflected in breath readings. There are 0% of companies within the HUI Index that are currently trading above the 50 day or 200 day moving averages.

But oversold breadth readings don’t stop there. A handful of days ago we saw the 88% of the components within the index make 52 week lows, one of the highest readings ever and an indication of total liquidations and free fall declines. Also of note, Bullish Percent Index is at a reading of 0%. This occurred once during the 2008 crash and a cluster of three times during the 2013. All of them led to major rebounds.

 

Chart 4: Hedge funds and other speculators are now heavily short Silver

Silver COT 

Source: Short Side of Long

As we wait for the this weeks release of the Commitment of Traders report, we can already assume that positioning is going from bad to worse. The bottom line is, a major shake out is in progress. Hedge funds have already been heavily short Silver and that is most likely going to intensify further. At the same time, sentiment surveys are showing an extremely negative picture, with hardly anyone believing Silver will rise from here. Sentiment readings aren’t any better in Gold and Platinum, where prices have been dropping like a rock.

Finally, speaking of prices… Gold is trading more then 3 standard deviations away from its 50 day mean yesterday. This is a very rare event, especially when Bollinger Bands are wide. It should be considered an extremely oversold condition, and judging by history it is from where powerful rebounds and mean reversions tend to occur.

 

Chart 5: Gold price is trading 3 standard deviations away from its mean

Gold Oversold 

Source: Bar Chart

 

Is this the bottom for Precious Metals like Gold and Silver? I do not think so, but I will say that we are getting quite close now. In other words, it should be matter of weeks or months instead of a matter of years. One thing is for certain, this is not a time to be entering new short positions on these beaten down assets.

Precious Metals investors have watched as a bear market slaughtered just about all assets within the sector. Even Gold is now down 40% from its all time highs. Regular readers of the blog will know that I thought that buying Gold at $1185 in 2013 was a very good entry.

I still hold that view today! Now the prices are sinking even lower towards $1100 per ounce, so buying Gold has gone from a very good entry towards a great entry. If it gets down to $1000 per ounce, it will be a magnificent entry. The lower it goes over the coming weeks and months, the better your return will be in coming years!