Gold And Mining Stocks’ Bottom Is Imminent

We believe that a bottom in Mining stocks and precious metals is imminent, ending their long corrective Bear Market since September 2011. Friday July 24^th’s price action formed a Hammer candlestick pattern, which often appears at bottoms. If you look at the chart below, you will see that this week’s sharp decline in Mining stocks is completing a large Declining Bullish Wedge that started back in late 2013. The fifth wave finally reached and dropped slightly below the bottom boundary. We need to see new Buy signals in our key indicators for confirmation. Then it should rise substantially for a long time. The coming rally should coincide with the coming stock market crash.

Gold also may have bottomed this week, but if not, a bottom is imminent. First of all, Gold finished a large Declining Bullish Wedge pattern from early 2013 this week, as its final fifth subwave dropped below the bottom boundary, a textbook finish to this pattern, finishing wave e-down of (2) down (see chart below). For Precious Metals, typically, the fifth wave is the most dramatic wave, whereas in stocks the most dramatic is the third wave. Thus the recent plunge in Gold during subwave e-down is typical, and means the completion of the pattern is nigh, and a bottom is imminent.

Further, Gold closed back above its Bottom 2 standard deviation Bollinger Band Friday, July 24^th, after closing below its bottom Bollinger Band 2 standard deviation boundary earlier this week, which is a Buy Signal.

Further, in the chart below (courtesy of countinpips.com), we show that the Commitment of Traders Weekly data continues to show that Net Large Speculators have reduced their Futures Long positions to near historic lows, while Insiders’, Net Commercial’s, Futures positions have risen, reflecting increased buying. I have circled each time over the past two years when the narrow spread we see now between the two, this same situation, existed. In each instance, GLD, the ETF that tracks Gold, began a nice rally.

Not only is this a Bullish development, it also sets up the possibility that the coming rally in Gold will be a strong rally, and once that rally begins, those Speculators who are short Gold futures will have to cover those short positions which will provide energy behind the coming rally. There are so many short positions, their need to cover (to buy what they have contracted to sell but do not own as prices rise above their contracted sell price) could be a demand gale force driving Gold higher once the rally begins. Gold could catapult.

Gold has been an alternate choice to sell to raise cash for investors in Chinese stocks that have had their trading halted, or for those who have been prohibited by Chinese edict from selling their Chinese stocks. This has been putting downward pressure on Gold. At some point this selling pressure will cease. 

Big picture, Declining Wedge patterns are termination bottom patterns, and it means Gold is headed much higher during the last 6 months of 2015, headed toward a minimum of 1,425ish by year end. It means that Gold could see a 40 percent rise from current levels this year. This means large degree wave (3) up is just about to start. While inflation is not a likely causal factor initially for Gold’s coming rally, we believe the short-covering mentioned above will be the initial spark, and a secondary fuel for this rally will be a black swan event that drives buyers to Gold as a safe haven, perhaps the same black swan event that will ignite a precipitous stock market decline. Gold has risen sharply during past stock market crashes, so a crash this year could fuel a huge move up in Gold. Then once the stock market plunges, we see central bankers printing money, hyperinflating the economy again, which will fuel Gold as a monetary inflation (devaluation) hedge. So three coming driving forces will push Gold and Mining stocks higher, starting real soon: 1)Short-covering, then 2) a Black Swan event, then 3) fiat monetary devaluation.

Our short-term key trend-finder indicators for the HUI Mining stocks, which also points out trends for Gold and Silver, moved to a Sell signal Tuesday, May 26^th, and remain there Friday. The HUI Demand Power / Supply Pressure Indicator generated an Enter Short Positions signal Friday, May 22nd, 2015, however it is now showing a Bullish Divergence (see chart below). On Friday, July 24th, Demand Power rose 12 to 377, while Supply Pressure fell 4 to 453, telling us Friday’s rally was strong, with two-thirds of the buying coming from shorts covering. Get used to this short-covering gale wind behind the push higher for Gold, Silver and Mining stock prices.

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2015, Main Line Investors, Inc. All Rights Reserved.