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Charts Suggest Precious Metals Are Moving Closer to a Bottom

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Although gold stocks are rallying today, expect more downside before a bottom.

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Though precious metals are rallying on the day I pen this, my firm expects more downside before a final bottom, or at least before we'll exit hedges and begin buying. Since the hard reversal in March, we've had the view that precious metals would decline and the miners could retest their December 2013 lows. We've held firm on this belief in recent weeks and wrote that a May decline could set up a June buying opportunity. Our analysis leads us to believe we are almost there, but not quite yet. A little more patience is required.

I want to begin with silver for several reasons. Recall that silver peaked in April 2011 while gold didn't peak until the late summer. It makes sense that silver would bottom first. In addition, the turn towards an inflationary environment (rather than a deflationary one) benefits silver against gold. Finally, silver is giving us clear and strong signals. The bear analog chart below shows that a little more downside should mark the end of the current bear (black line).
 
may29silverbears
 
In addition, here is a chart we posted in late March when we discussed the coming opportunity in silver. The chart shows an 11-year trendline marking what should be rock-solid support at or slightly above $17. A final decline could touch the trendline and then begin a strong reversal.
 
may29silvertl
 
Gold's bear market has been severe to this point but not when judged through the lens of history. The bear analogs below suggest gold has more downside potential and could easily make a new low. If and when the weekly low of $1,200 breaks, gold could plunge to its bottom within a few weeks. Keep an eye on $1,080, which is the 50% retracement of the entire bull market.
 
may29goldbears
 
The potential decline in gold sounds severe, but consider the following: We already mentioned why silver should bottom before gold. Also, the gold stocks began topping in December 2010, well before gold. Silver stocks and junior miners -- iShares Silver Trust ETF (NYSEARCA:SIL), Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ), and Global X Gold Explorers ETF (NYSEARCA:GLDX) -- peaked in April 2011. Although the large-cap miners (Market Vectors Gold Miners ETF (NYSEARCA:GDX)) peaked at the same time as gold in summer 2011, the majority of the mining sector peaked months before. Hence, it would not be a surprise to see the mining stocks or some of the sector bottom before gold. History makes a strong argument that this leg down in the miners is the final leg down.
 
may29goldstockbears
 
The bears analog chart argues that gold stocks could make a double bottom or perhaps a marginal new low. In my opinion, a new low would be a false new low. The next chart is a weekly plot of the NYSEARCA Gold Bugs Index (INDEXNYSEGIS:HUI) and AMEX Gold Miners Index (INDEXNYSEGIS:GDM), the forerunner to GDX. The support (or buy) targets are quite clear.
 
may29huigdm
 
Although gold stocks are rallying today, my work leads me to believe that there is more downside before a bottom. The good news is the sector is now much closer than it was a few weeks ago. Yet, patience and discipline will be the name of the game over the coming days and weeks. Discipline is required to exit hedges at the right time while patience is required to buy as low as possible. I am looking at Direxion Shares Exchange Traded Fund Trust (NYSEARCA:JNUG) (3x long GDXJ) as well as several juniors I believe have exceedingly strong upside potential over the coming quarters and years.

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
No positions in stocks mentioned.

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.

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