Precious Metals Update

While majority of the traders and the financial media is focused on the US stock market, stuck in a argument between whether the recent correction is finished or not, the real action is occurring in commodities (from the longer term value perspective). Various commodities and related producing sectors (miners) are attempting to break out of their bear markets, which started in early parts of 2011. Sold down and punished over the last few years, it is these sectors that offer value, unlike sky high developed market stocks.

Chart 1: Gold breaks resistance, while Silver continues to lag

Precious Metals 

Source: BarChart (edited by Short Side of Long)

Gold and Silver are attempting to break above their recent well defined resistance levels. For Gold the area of resistance is between $1,270 to $1,280 per ounce, while for Silver it is between $20.45 and $20.70. Gold decided it was time to break out during Janet Yellen’s first ever testimony, while Silver still continues to hesitate below its nine month support / resistance pivot line.

Chart 2: Silver’s volatility is at the second lowest level in over a decade!

Silver Bollinger Bands 

Source: BarChart (edited by Short Side of Long)

The interesting condition in Silver, the worlds most volatile asset class, is that volatility has completely died out. The chart above shows how compressed the Bollinger Bands have become, indicating that sooner or later a major move is coming. When compared to other periods of low volatility over 50 days, the current conditions rank as the 2nd lowest in over a decade. We have to go back all the to mid 2005 to see something similar.Silver tends to lead Gold in gains during uptrends, the same way it leads Gold in losses during downtrends. The behaviour is tracked by following a Gold Silver ratio. Sceptics and bears would currently argue that Silver’s non-confirmation is a sign that the overall sector isn’t at a final low just yet. On the other hand believers and bulls would argue that the true leaders are mining companies.

Unlike Silver, the underlaying commodity producers seem to be leading the way for the overall Precious Metals sector, as they attempt to break above their respective 200 day moving averages. The chart above shows Gold Miners, Gold Juniors and Explorers, together with Silver Miners attempting to push above their long term moving average trends. The improvement in breadth participation, together with a technical breakout, is also a welcomed signed after a monster bear market over the last few years.

Chart 3: Gold and Silver mining companies are attempting to break out

Gold & Silver Miners 

Source: StockCharts (edited by Short Side of Long)

Gold Mining Juniors (GDXJ) have been registering huge volume on consistent basis, as the sector tries to break above its 200 day MA for the first time in over a year. Furthermore, the last time Gold Exploration ETF (GLDX) traded above the 200 MA was for one week in September 2012 and before that all the way back in August of 2011, just as Gold was peaking at $1921. So all in all, some promising movements, but further confirmations are necessary.The old saying is that the price trend is most fragile at the beginning and at the end.Therefore, the reversal of the bear market in the PMs sector needs to prove itself over the coming weeks and months. If established, trend followers (investors who herd like sheep) will slowly began to jump on the bandwagon one by one pushing the price even higher.