Just how much more can the precious metals market rally before finally turning south?
The truth is that during the buying frenzies, it’s near-impossible to pinpoint the exact reversal price/moment. Right now, gold and silver are up and so are the mining stocks – once again, while the USD Index continues to do nothing. This is disappointing on one hand, but on the other hand it’s still within the historical norms.
The key thing is, however, that once the reversal takes place, the price is likely to decline just as sharply as it had rallied – or perhaps it will decline even faster, as fear is a stronger emotion than greed.
Yesterday, I wrote the following:
I don’t want to once again write that “this time this is really it”, but it still seems that the end of the rally is near – if it wasn’t completed already.
Last week’s reversal in the USD Index continues to provide the foundation.
This is a huge development and my last week’s point remain up-to-date:
It’s not “just” an invalidation of the breakdown to new yearly lows. It’s a major weekly reversal!
The same kind of reversal that meant local bottoms in April and in June. The difference now is that this is the second bottom, which what used to start huge rallies in the past, but I already wrote about it [on Thursday] – the thing that I want to add on top of that is that the USD Index is UP this week. This makes the implications of the current situation here even more bullish – extremely so.
Despite the above, gold is not down this week – conversely, the entire precious metals sector moved higher.
(…)
Speaking of reversals, that’s what miners are doing on an intraday basis. Perhaps this two-day rally is the final breath of the dying bull. We’ll see soon, but even if this is not the case immediately, it still seems that miners’ rally’s days are numbered.
While miners ended yesterday’s session higher, the above description perfectly fits what’s going on today.
Miners are reversing even though gold isn’t – perhaps this really is IT.
Quoting further:
Back in 2008, neither gold, nor miners, topped right when the USD Index bottomed. They PMs top was delayed by a few days. In particular, miners topped about a week after the USD Index did.
The USD Index bottomed last Wednesday, so if the analogy is to continue, gold and miners can top literally any day now.
That’s all true and up-to-date. The thing that I would like to add today is that the long-term picture for gold stocks not only shows that the current rally in gold stocks is only a bit bigger than the rallies that we saw previously, but that we’re approaching an extremely strong resistance level – the all-time high.
That’s the 2011 top that is just about 6% above the current value of the HUI Index. That’s the ultimate resistance. Will gold miners rally this far? It’s not clear – given how overbought they are and how likely it is for the USD Index to finally start moving higher, gold stocks could top any day or hour now. Perhaps today’s reversal marked the top.
There are two more things on the above chart that I’d like to emphasize:
1. The USD Index’s similarity to what we saw in 2011. The short-term chart that I featured above provides the close-up of the situation, but the big picture shows that the medium-term moves (the zigzag that formed over several years) are also aligned.
2. Gold’s jump higher in 2011 and right now – both patterns share this similarity.
All this further increases the strength of the scenario in which the precious metals sector tops soon – in a matter of days or weeks.
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Przemyslaw K. Radomski, CFA
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