CHARTS: Have Gold and Silver Stocks Bottomed?
Last week, stocks in the precious metals sector tried to make new lows and failed.
The first chart shows the speculative position (for gold and silver combined) as a percentage of open interest. The black is a price index comprised of gold and silver. At the June low, speculators were only 4.6% long as a percentage of open interest. That marked a 12-year low. It is currently 11% and was as high as 52.8% in 2012.
Before Christmas, public opinion on silver was near 20% bulls. That was in the bottom 3% of all readings in the past 20 years. At the same time, the speculative position in silver was in the bottom 8% of all readings in the past 20 years. (Source: SentimenTrader.com)
This chart from Tiho Brkan, shows the Central Fund of Canada and its premium, or discount, to NAV. At the June low, the discount was 7%. Shortly thereafter, the discount surpassed 8% though CEF did not make a low in price. That was the highest discount to NAV in 12 years! The current discount is 5%.
Assets in the Rydex Precious Metals Fund have evaporated from $370 million to $58 million. I don't have the history handy, but I believe this is near a 10-year low. Even more striking is the decline in assets as a percentage of all sectors. That is down to 4.7%, which is well below the 2008-2012 lows.
Sticking with precious metals stocks, we see that short interest is very high in Market Vectors Gold Miners ETF (NYSEARCA:GDX). This isn't necessarily bullish. The shorts have been correct for more than a year. However, short interest surged in November and December of 2013 and the stocks failed to make new lows in December. If short interest remains high in January and the market continues to firm, then its bullish. (Source: Schaeffers Research).
Just like history, sentiment does not pick or ensure a bottom. The best thing to do is to wait for a combination of extreme negative sentiment and very strong technical support. We were hoping the precious metals complex would plunge further to that very strong technical support noted in recent editorials. It could still happen. However, we have to listen to the market and its price action. The gold and silver stocks failed to make new lows in December of 2013. Last week gold and silver tried to make new lows and failed.
If precious metals fail to make new lows when sentiment indicators are at decade extremes, then how could they make new lows in the near future? There are some speculative longs in the market (11% of open interest) who could drive it lower temporarily if metals don't rally soon. As we've said, any sell-off is likely to be final and would produce a strong rebound. If that doesn't happen, then the market could continue a slow, grinding saucer-type of bottom. The longer this drags out then the more likely that is. The age and depth of this bear, extreme negative sentiment, lack of new lows, and recent relative strength in the shares lead us to err on the bullish side.
Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter