You want to talk about strong trends, it’s hard to find a cleaner downtrend than what we’ve had in precious metals since 2011. The Gold bugs have gotten really quiet and I’m actually starting to miss them. Remember how obnoxious the silver permabulls were 5-6 years ago? We’re near levels where metals are just a joke and from an anecdotal perspective, one might think that they couldn’t possibly go any lower as they are arguably the most hated asset class on earth. But the data suggests otherwise. In fact, sentiment, although just off bearish extremes, isn’t anywhere near the levels we’ve seen at prior pivot lows over the past few years.
Only price pays, remember that. So we’re going to focus on what is actually happening within supply and demand in order to formulate a thesis. We prefer to take a weight-of-the-evidence approach and everything continues to suggest that lower lows are likely coming soon. Here is a weekly chart showing prices below the downtrend lines from the highs the last couple of years. Notice how we are also below all of that former support from 2013 and holding below the uptrend line from last year’s lows. All of this is evidence to us that there is currently way too much overhead supply to get bullish from a structural perspective:
Also notice how momentum is in a bearish range. We use a 14-period Relative Strength Index (RSI) and the fact that it can’t even reach overbought conditions on bounces and continuously gets oversold readings increases our bearish conviction as this is characteristic of downtrends. As far as targets go, I’ve been eyeing that $1000 level for a few years and I still think that’s where we’re headed. This was former resistance back in 2008-2009 before prices essentially doubled into 2011:
Now that we know there isn’t enough evidence for us to look for a longer-term bottom any time soon, we turn to the daily timeframe for execution and risk management purposes. This one looks pretty clear to me. Prices broke down in early summer below what had been support since last Fall and the uptrend line from those November lows. Immediately Gold reached the 161.8% Fibonacci extension of the last rally we saw, which was this Spring, and prices bounced nicely. We then ran up to all of that former support, which turned into overhead supply, as it should have, and prices have struggled with that area ever since:
At this point, all signs are pointing to a break of that uptrend line off the July lows. Upon that break, we should find support near that 1080 level which was support in the Summer as well as the 161.8% Fibonacci extension from the Spring rally. But I think that will only be temporary as the bears remain in control and all of this overhead supply has yet to be absorbed. It takes time. It looks like we’re heading down towards $1000. This is not only that former resistance from 2008-2009, as mentioned in the weekly timeframe above, but also the 261.8% Fibonacci extension of the Spring rally. That’s where I would be covering shorts.
From a risk management perspective, I see no reason to be short if prices are above the downtrend line from this January’s highs. As long as we remain below that, which also coincides with the broken uptrend line from last Fall’s lows, I think we can press shorts all day long. This level is very clear. We like that.
To add to our bearish conviction, I want to point to Platinum. We are watching Platinum continue to make lower lows and we have targets much lower than current levels. We want to look at precious metals as a group. The weight-of-the-evidence here suggests they’re going lower together. Gold should roll over to new lows soon as well. I really like this one.
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Tags: $GLD $GC_F $GDX $NUGT $JNUG $PPLT $PL_F $SLV $SI_F