Precious Metals Outlook Mixed, but Hope Remains

The outlook for precious metals and precious metals stocks remains mixed, and bearish overtones continue to hang over the market to be sure. But based on our reading of the tape there is light at the end of the tunnel.

We forecast in our last precious metals commentary that gold was due for a short-to-intermediate-term bounce to higher levels. Our forecast turned out to be ill-timed, primarily due to our eagerness to see a gold rally in the face of a concerted and vicious sell campaign among gold bears. We gave a bit too much leeway to the indicators which appeared to be bottoming but-and most importantly-were not actually in bullish territory. This is the bane of every technical analyst and a mistake to be guarded against at every turn-that of trying to run ahead of the indicators rather than letting the indicators dictate one's analysis.

That being said, our reading of gold's tape this time around will be tempered with a more earnest appraisal of the market, especially in relation to the broader picture. And right now, that picture presents itself to us with many contrasts.

Make no mistake about it, gold's long-term trend continues to be characterized by ongoing selling pressure led by central banks, governments and institutions. There can be no denying that the various conspiracy theories that have come to dominate the discussions of gold bugs of late are imbued with an element of truth. That simple truth is that gold is and continues to be a detested monetary unit among the world's governments and their sympathizers. But enough pontificating. Let us look beneath the surface of all this intrigue and let the market itself tell the true story.

From a long-term perspective, gold remains weak, trading within the confines of a descending channel and below its declining 200-day moving average. However, the gradient of gold's descent has diminished and it appears that gold may be trying to form a rounding-type bottom over the next few months. Of course, it remains far too early at this juncture to speculate but it remains a distinct possibility and we must in any wise let the market work itself out before commenting further on the long-term picture.

In the shorter term, gold also continues bearish but shows far greater signs of improvement than it has the entire course of this year. Specifically, we note that gold's daily one-year chart is forming a distinctive saucer bottom-some would say a head and shoulders-and, while it continues to hover near its lows is at least finding a bed of support in the $255-$260 range. Of greater significance is the fact that its 32-day moving average (an important one from both a technical and a cyclical perspective. The 32-day timeframe is significant in that it occurs halfway between the Hurstian 30-day timeframe and the Fibonacci 34-day timeframe and seems to come closest to expressing the optimal average preferred by most markets.) is showing possible signs of bottoming out. Gold's price, however, continues to trend below the MA, a reflection of its current weakness. What we must now be alert for is for the 32-day MA to begin rising, which will be one of the most important technical indications that gold is beginning to turn around on at least a short-term basis, so we must watch this indicator carefully.

What gold needs to do now in order to rise is to successfully overcome trendline resistance at approximately $258, and then chart resistance at $265 (basis futures). Clearing these two hurdles would likely propel gold considerably higher based on massive short covering, if nothing else. Failing to do this, however, would ensure that gold's bear market will continue to growl in the weeks ahead.

A breakdown of gold's momentum factors is most informative. Gold's 10-day momentum chart is tracing out a clear-cut ascending triangle pattern, which is almost always bullish. In fact, as market analyst Martin Pring asserts in his book, Pring on Market Momentum, whenever classic chart patterns appear in momentum indicators it usually portends an exceedingly strong move can be expected. Because short-term momentum in this case is consistent with a bull move, we would hope to see a strong upside move in gold's price soon.

Volume patterns in the gold market are mixed. The chart showing On Balance Volume (OBV), for instance, is well below the equilibrium, or zero, line. Yet it appears to have registered a double bottom and is starting to turn higher. As well, OBV's 30-day moving average is turning higher, and OBV is above its moving average-a positive sign. This indicator is still inconclusive as far as supporting an incipient bull move in gold but it cannot be ruled out as a potential proof.

Other volume indicators present a mixed signal, as well. A volume indicator that we rely on and is a variation of OBV but in many ways more accurate is one we have termed "Mid-range Volume" (MRV). MRV is a measure of daily volume in relation to a market's intra-day trading range. To calculate MRV, simply subtract the extreme high point of the day's trading range from the extreme low point. Divide that number by two and you have the day's mid-point. Then determine whether the day's closing price is above or below that mid-point. If it is, total trading volume for the day is considered to be upside volume. If the close is lower than the mid-point, all volume is treated as downside volume. This indicator is less accurate than one developed by Marc Chaikin, called Volume Accumulation, which goes one step further and assigns a percentage weighting to the closing price in relation to its trading range, but it is superior in that it tends to produce a better chart (i.e., it clearly shows the overall trend better than both OBV and Volume Accumulation). MRV, then, shows whether a security is being accumulated or distributed. And our reading of the gold's daily MRV chart, while still exceedingly bearish, is showing signs of bottoming. It is too early to call a bottom in gold based on this indicator but we are at least given some hope that gold is trying to turn around.

One measure of technical strength that cannot be ignored is the indicator known as Relative Strength. This is not to be confused with the Relative Strength Index (RSI) which is more a measure of internal strength. True Relative Strength (RS) measures, in this case, the price of gold in relation to the overall commodities market (as measured by the CRB index). And while the CRB has been showing surprising strength of late, gold's RS is strongly negative relative to the overall commodities market. This is a very bearish sign and one that should not be discarded. Until gold's RS line improves we must hold off on going long the gold market. Gold may very well be trying to turn around at the moment but it must first manifest an improvement in Relative Strength before this move gets fully underway.

Bearish factors aside, there is at least some good news for gold bugs to chew on right now. As we mentioned above, the overall commodities market is looking more and more to have registered a bottom. The CRB commodities index may have double bottomed this summer and is moving higher as we head into the new millennium, led by the petroleum and grains complex. Even industrial metals such as copper, which tend to precede gold strength, are showing signs of life. Palladium, which tends to lead the precious metals complex, is starting to turn higher as its price is moving above its rising 30-day moving average-an encouraging sign. Perhaps palladium is telling us that a gold bull market isn't too far away. Also encouraging for gold is the fact that silver appears to be consolidating a base of support for a nice upmove on at least an intermediate basis (a subject we address briefly in our latest book, Elliott Wave Simplified, available now from Amazon.com).

For gold and silver traders the market actually presents a favorable climate, at least in the short-term. The XAU gold and silver stock index is trying to bottom out and actually has the appearance on the chart of having traced out a head and shoulders bottom. The XAU's 32-day moving average is rising and is providing underlying support to prices-an excellent sign. Money flow into the XAU has also been bullish of late.

Even more positive, some of the leading blue chip gold stocks are looking like real bargains right now. For example, Franco-Nevada's chart looks promising, with prices rising above its rising 32-day MA. Technical indicators such as the MACD, RSI and Money Flow Index are also strongly positive for Franco-Nevada. A short-term buy. But investors be forewarned: there is much overhanging resistance that must be cleared before Franco-Nevada can be declared an all-out winner. Shorter-term traders should definitely have a look, but longer-term investors should probably avoid for now until an even clearer picture emerges.

The outlook for Barrick-the bluest of the blue chips-while less positive than that for Franco-Nevada, is still somewhat promising. The most bullish factor of Barrick's chart is that fact that its 32-day MA is rising strongly with prices not too far behind. If prices can make it above the MA and the MA continues rising, long positions in Barrick should be considered.