The fledgling rebound in the precious metals complex suddenly reversed course. Since the intraday peak last Thursday, gold stocks (GDX and GDXJ) declined about 13% while Gold lost $1100/oz and today (Thursday) $1080/oz. Silver, which did not mount much of a rebound to begin with remains mired below $13/oz. Gold is showing increasing relative strength (as we noted last week) and that is a good thing. However, the poor performance from Silver and sudden sharp reversal in the gold miners signals that the sector is on the cusp of making new lows.
Let me start with Silver, a market I have not covered in recent missives. The daily candle chart below includes the 50-day moving average and the net speculative position (as a percentage of open interest). Over the past two months Silver has been in a bearish consolidation with support at $13.60/oz and resistance at $14.40/oz. Silver’s numerous failures to recapture resistance at $14.40/oz and recent failures at the declining 50-day moving average augur for a break to new lows. Initial downside targets are $12.60 and $12.00, which is a very strong Fibonacci target.
The lack of extreme bearish sentiment is also damning. As of last Tuesday when Silver closed at $14.00/oz, the net speculative position was 17.2%. That is quite high given the current bearish trend. The net speculative position declined to 6% or below three times since 2013. There is room for more selling in Silver.
The immediate prognosis for the gold miners is just as dire.
The chart below plots the weekly candles for GDXJ and GDX. Note how the miners failed to close above resistance last week. GDXJ failed to hold its gains above $20 while GDX failed to move beyond $15. The miners, since that failure have declined nearly 10% and are threatening a breakdown in the days ahead. The miners have potential measured downside targets of $10.30 for GDX and $13 for GDXJ.
The implications of continued poor performance from Silver and the gold miners could be two fold. First, they could be hinting of Gold’s strong potential to decline to major support around $970/oz. Second, and with respect to the mining companies, their poor performance coupled with lower metals prices increases the risk of some major bankruptcies in the sector. Hence, traders and investors need to be very careful in owning broad baskets like GDX and GDXJ. Those with a long bias should consider hedging their portfolio by going short Silver or the miners. The time to clear hedges and accumulate quality companies figures to be when Gold is very oversold and nears major support amid extreme bearish sentiment. Note that three of the last four major bottoms in Gold occurred in February or March. As we navigate the end of this bear market, consider learning more about our premium service including our favorite junior miners which we expect to outperform in 2016.
Jordan Roy-Byrne, CMT