What’s Next for Precious Metals?

As predicted, precious metals have been weak as of late. During the price reversals in early July, I warned that sentiment became overly optimistic while prices remained in a technical downtrend. Even though I hold large core Silver investment, I decided that a smart thing to do was to hedge this investment with Gold and Silver short hedges. I did this just as other speculators were piling in, expecting higher prices. A sell off has run for several weeks now, so what’s next for the precious metals sector?

Chart 1: In August hedge funds continue to build bullish Gold positions

Gold Sentiment 

Source: Short Side of Long

Price wise, the yellow metal continues to consolidate in a triangle formation. Recent price action shows that the price of Gold has fallen to the lower support range of this triangle. At the same, we have now broken below the 200 day moving average. I am sure a lot of technical analysts will now be concluding that this is a worrisome signal.

While sentiment isn’t overly bullish right now, futures positioning via CFTC’s commitment of traders report shows that hedge funds and other speculators have continued to add Gold net longs even as the price is falling. I must admit, it is remarkably difficult to make a bullish case with that in mind.Side note: please remember that COT and survey data is delayed by a week.

Chart 2: In July sentiment and positioning on Silver was overly bullish

Silver Sentiment 

Source: Short Side of Long

Relative to Gold, Silver’s sentiment was even more exuberant in early July. As already mentioned in earlier posts, I was just astonished as to how quickly hedge funds and other speculators went from being extremely negative to overly positive in the Silver market. Observing the price, Silver fell below its 200 day moving average well before Gold and is currently down six weeks in the row.

This market is narrowing into a ridiculously tight range, especially for an asset that is one of the most volatile in the world. The pattern of lower highs still remains in place, and until broken, signals bears are in firm control. Side note: please remember that COT and survey data is delayed by a week.

Chart 3: Could Gold Miners be leading the metals out of a bear market?

Gold Miners vs Gold 

Source: Short Side of Long

However, the situation is not as simple as concluding that Gold and Silver will continue to sell off lower. While metals look sluggish, Gold Miners are acting a lot more confident, as if an upside breakout could be around the corner. In recent posts, I’ve discussed the fact that internal breadth of Gold Miners stands at the highest participation in 3 years. Furthermore, after disastrous few years,Gold Miners are starting to outperform other major global macro assets. Finally, the index of mining companies continues to consolidate just below the important resistance neckline (refer to Chart 3), even though US Dollar has been rallying and pressuring the overall PMs sector (refer to Chart 4).

What is even more interesting is the way Gold Miners are outperforming Gold right now. The blue line in Chart 3 looks at the relative strength of miners vs the yellow metal. One could make a conclusion that the mining index has bottomed out just like in 1998, 2000 and 2008. Mind you, the outperformance did not last all that long in 1998, and eventually Gold Miners fell to a final lower low.

So, could Gold Miners be leading the metals out of a bear market? It is hard to say right now. To make a positive case, miners would have to breakout on the upside first. From the technical perspective HUI Gold Bugs Index needs to close above 255 to 260 area, GDX ETF above $28 and GDXJ ETF above $46. We would also need to see an improvement in the metals. Finally, it would help to see US Dollar Index potentially pull back from its overbought levels right now. Either way, the market is about to reveal its hand very soon, so stay patient and watch Gold Miners closely!

Chart 4: Dollar rally has become overbought from short term perspective

US Dollar Overbought 

Source: Stock Charts