Don't Expect a Breakout in Gold or Silver Any Time Soon
There's more weakness ahead for the precious metal sector.
Looking further out, forthcoming weakness shouldn't last that long in the big picture. The miners have been basing for quite a while and started to gain traction in Q1. The next low at worst could be a double bottom or otherwise would mark the first higher low in this bottoming process. In the chart below, I've plotted the Market Vectors Gold Miners ETF (NYSEARCA:GDX) (large caps), Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ) (juniors), the iShares Silver Trust ETF (NYSEARCA:SIL) (silver stocks), and Global X Funds (NYSEARCA:GLDX) (explorers). In the chart, I note how much each would have to decline to test its December 2013 low.
My firm's "gold stock bear analogs" chart, which helped us call the June 2013 low and anticipate the December 2013 low, makes a strong argument that the final low (on a weekly basis) occurred in December. The low is circled, but we kept the plot going for further comparison.
Compared to the present, there are only two bears that lasted longer, and at present, both were down less than 50%. Note that at the December low, when gold stocks were down 64%, the three bears that lasted longer were off no more than 50%.
The 1996-1999 bear, which ended at this time down 69%, is an interesting case. It did reach lower levels in 2000 before the current secular bull started. However, after the 1999 low, gold stocks exploded, led by the Amex Gold Miner Index (INDEXNYSEGIS:GDM) (forerunner to GDX) which surged 75% in a few months. Then the stocks consolidated for many months before popping again. During this brief 14-month respite, the GDM gained 90%, the PHLX Gold/Silver Sector (INDEXNASDAQ:XAU) 83%, and the NYSE ARCA Gold Bugs Index
(INDEXNYSEGIS:HUI) 68%. After the bottom in 1999, GDM and XAU broke to new lows two years and two months later. The HUI, which was more attached to the epic junior bubble of the mid 1990s, reached new lows one year and nine months later.
Considering this history, even the most bearish person would have to admit that the market needs to consolidate for a while (as in, way more than a year) to have any chance to reach new sustained lows. Gold stocks enjoyed a huge short covering rally shortly after the 1999 low. Yet even after the short covering ended, the preceding bear market low wasn't breached for roughly two years!
Why is this bottom taking so long? A few weeks ago my firm posited that it could be because of the extended topping process in 2011-2012. Perhaps that unusual topping process is giving way to an unusual bottoming process. In any event, the best plan is to wait patiently for the next oversold condition, or in case we are wrong, wait for the next breakout. I don't expect a breakout anytime soon. The indices look weak and TheDailyGold Top 15 Index (15 of our favorite companies) also appears to have downside potential in the coming days and weeks. Nevertheless, I am actively researching companies as well as watching their price action. The coming months could be your last best chance to accumulate the companies poised to benefit from the coming revival in precious metals.
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