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Strong Evidence of an Important Low in Gold Stocks

Two weeks ago we proclaimed a major bottom could be imminent in the precious metals sector. Our basis for making the prediction was that the metals and shares were extremely oversold, breadth indicators were at 2008 levels, sentiment was contrarian bullish and markets were nearing areas of strong support. In this missive we review the compelling evidence for this important bottom and discuss the potential fundamental driving forces for the start of the next cyclical bull market in this sector.

Two weeks ago GDX formed a bullish reversal at the 50% retracement (2008-2011) amid an all-time high in weekly volume. The market showed excellent follow through last week as it gained 7.9% on substantial volume. Also note that the 4-week moving average of the bullish percent index (a breadth indicator) reached the 2008 low.

GDXJ (larger juniors and mid-tier companies) also formed a major reversal on massive volume and would gain 7.5% last week.

Also encouraging is the relative strength of the shares which usually lead the metals at key turning points. In the chart below we plot Gold, GDX, and GDXJ. Note the positive divergence in favor of the shares.

The length of the current cyclical bear market (because that is more apt than “correction”) implies that the sector should soon begin a new cyclical bull. The HUI (large caps) Gold Bugs Index has endured three primary corrections or cyclical bear market downturns. The 2004-2005 consolidation lasted 18 months and declined by 37% while the 2008 downturn lasted six months but declined by 71%. The recent cyclical bear has lasted 18 months and declined by 42%. Corrections or bear markets are a function of price and time. Typically, less severe downturns will be spread out over a period of many months while the most severe downturns tend to culminate quickly (2008).

Though the HUI was only in a bear market for six months in 2008, most gold shares peaked sometime in 2007. Some peaked at the end of 2007 while some peaked in April 2007. Below we show an index which consists of 20 companies (most of which are producers too small for the HUI) and has a median market cap of $900 Million. It peaked in April 2007 and would bottom 16 months later. Each counter-trend move has lasted 16 to 18 months. This bear market has lasted nearly 18 months and at the recent low, was 50% off the high.

Clearly, we have presented some compelling evidence that the gold shares have completed an important bottom. A rebound is underway and should continue well into June. However, until we see a successful retest of this low we have no way to confirm if this is the start of the next cyclical bull market. We technicans sometime feel that we can call every tick and turn of the market. We must remember that fundamentals drive markets and trends. Technicals are a context, not a catalyst. That being said, technicals lead fundamentals and reflect fundamental themes as they develop under the surface.

Positive fundamental catalysts include the likelihood of a new rate cutting cycle in China, the inevitable monetization of European debts by the ECB and the potential for a shift in Fed intentions given global economic uncertainty amid falling inflation and weak commodity prices. Our job is to weigh the technical and sentiment data in tandem with the potential positive and negative catalysts. Should these aforementioned catalysts emerge in tandem with favorable technicals, then we’ll have stronger confirmation of a new cyclical bull market. In the meantime, we continue to focus on the companies best positioned for and most likely to take advantage of the inevitable next leg up in this bull market in precious metals. If you’d be interested in professional guidance in this endeavor, then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT

7 Responses to Strong Evidence of an Important Low in Gold Stocks

  1. Martymc5 05/28/2012 at 10:01 am #

    Thanks for your postings.CMT’s are important to many of us. Do you do any work on turn dates. One of the CMT’s in this area (WASH DC) regularly mentions them.

  2. goldragon 05/28/2012 at 3:37 pm #

    Summer will have gold price down because of EU debt problems and China and India slow down. In such a situation, can gold stocks get a rally?
    It seems gold stocks are rallying up, but for how long this can it last?

  3. trendsman 05/28/2012 at 3:38 pm #

    Marty, I do not believe much in cycles…only 15-20 year cycles. Shorter-term cycles are unpredictable. 

  4. goldragon 05/29/2012 at 10:19 pm #

    From current situation, Gold may test $1400, Silver $25-26. this kind of drop may induce GDX to go back to $40, even go to $34. This will make these, who hold gold stocks and gold efts, feel very fear, very fear.Therefore I think we may still be far from the bottom of GDX and HUI.

  5. Guo Ying Zhao 05/31/2012 at 9:05 pm #

    From Today’s GDX chart, you can see a top is forming.
    If this is what markets intension is, then we may need to test the low and even go to a new low.
    Here we see a lot of bad news from Europe and USA, and Asia.
    Technically, USD goes up without interrupt, Euro going down like craze, thus you can not stop the deflation and gold may go down another $250. Therefore GDX will go down to $33 or $30.

  6. Gunny 06/01/2012 at 11:26 am #

    Prepare to be ready to turn back to inflation from deflation in a few weeks!


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