After a severe selloff, precious metals have enjoyed a bit of a respite. Corrections are a function of time and/or price. The correction to the recent selloff has been more in time than than price. Metals and miners have stabilized over the past nine trading days but have not rebounded much in price terms. Gold has barely rallied $20/oz while GDX and GDXJ have rebounded less than 4% and 5% respectively. In addition to the weakness of this rally, the gold stocks are sporting a negative divergence and that does not bode well for an end of the year rally.
The negative divergence is visible in the daily bar charts below. We plot Gold along with the gold stock ETF’s and are own “mini” GDXJ index. The price action in Gold since October looks constructive. The market has held its October low and the 200-day moving average. It could have a chance to reach $1300-$1310. However, the miners are saying no to that possibility. Everything from large miners to small juniors made a new low while Gold did not. The second negative divergence is in regards to the 200-day moving average.
Gold has corrected $100/oz over the past seven weeks but the relevant sentiment indicators do not indicate much of a shift in sentiment. In the chart below we plot the net speculative position in Gold as a percentage of open interest (Gold CoT) and the GLD put-call ratio. The CoT remains elevated at 40%. The two important lows of the past 12 months occurred at 16% and 26%. The put-call ratio (which is smoothed by a 20-day moving average) has some work to do before it reaches a level associated with market lows. Finally, Gold is not oversold based on a simple 50-day ROC.
The relative weakness and negative divergence in the gold stocks coupled could portend to lower Gold prices by the end of 2017. Gold has important support at $1260 and if it loses that it threatens a decline to $1200-$1220. The gold stocks are lagging Gold across the board with the worst performers being the smaller juniors. Given the weak technicals and questionable fundamentals for Gold, we will continue to wait for lower prices, worse sentiment and a low risk buying opportunity in the coming months. The good news is those who buy weakness in the months ahead can position themselves for strong profits in 2018. In the meantime, find the best companies and evaluate their potential value and catalysts that will drive buying.
Jordan Roy-Byrne CMT, MFTA