Gold: Rebound or Another Breakdown?

The precious metals complex has attempted to stabilize over the past few weeks. Some markets have had more success than others. Gold has been able to hold $1080/oz while GDXJ has also held its recent low. The large cap indices (GDX, XAU, HUI) have grinded lower to new bear market lows this week. This leads us to the near term predicament. Is the sector basing before a rebound or merely consolidating before another steep leg down?

Gold will certainly give us the answer and it could come within a few days. While Gold has held support at $1080/oz it has yet to break above $1100/oz. A daily close above $1100/oz would likely lead to $1140/oz whereas a daily close below $1080/oz could lead to a decline down to major support around $1000/oz. We should note that the current net speculative position in Gold is the lowest in 14 years at 3.4% of open interest or ~15K contracts. I would not be surprised to see speculators eventually become net short Gold.

Gold is not quite as oversold as the gold miners which have been beaten and bludgeoned to death. GDXJ and GDX, charted below, show black candles in each of the past seven weeks and in GDX’s case eleven of the past twelve weeks. The miners are extremely oversold based on any and every metric and period. Note the price action over the past few weeks. The miners have failed to rally but have not closed near the lows of the week. That suggests waning selling pressure or accumulation. A rebound could begin at any moment.

It would be quite interesting to see what happens to the miners if Gold were to break below $1080/oz and decline towards $1000/oz. Given that the miners are already extremely oversold (and in their worst bear market ever), it is quite possible they begin to rebound before Gold reaches support at $1000/oz. In addition, if this is the way Gold breaks (lower rather than higher) then it is also quite possible that the bear market ends after that decline. That would be sooner than everyone expects.

The near term remains uncertain but we could get clarity on Friday. In any case, the precious metals sector is due for a rebound. Failure to rebound in the days ahead tells us that we could ultimately see an even greater and more significant rebound from lower levels. As we navigate the end of this bear market, consider learning more about our premium service including our favorite junior miners which we expect to outperform in the second half of 2015.   

Jordan Roy-Byrne, CMT

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