Gold, silver and the mining sector have not bottomed yet

As a bull on both gold and silver I do expect that this sector will shine once again, hopefully in the not too distant future. However we are still of the opinion that this gold bull market remains in a bear phase for now. The timing of market directional changes is critical to the success of any investment. We all know that it is impossible to pick the very top or the very bottom of the market and so enter and exit the market with absolute perfection. That just does not happen, but it is incumbent on us to try and get as close as possible to these turning points in order to maximise our profits.

The June low for gold prices is widely believed to the bottom for gold and hence it is considered to be the very turning point that we need in order to trade with a high level of confidence.

Gold is trading around $100/oz above those lows, silver is about $2.00/oz above its low point and the mining sector as evidenced by the Gold Bugs Index, the HUI, is sitting about 40 points higher than it was back then.

So why the trepidation and unease about the current situation – well we will try and lay out some of the issues that concern us below and would ask that you add your opinion to this debate especially if you disagree with our premise.

If we can get a handle on the big picture then we will have set the stage for some profitable trading, if we get the big picture wrong then all the detailed analyses that flows from it will have been a complete waste of time, effort and capital.

Gold and Silver

Since the heady days when gold hit $1900/oz it has lost some of its luster, correcting by more than one third to trade at $1200/oz in June 2013. At this point a summer rally began; taking gold prices as high as $1420/oz in August 2013. Silver joined in the fun and followed gold to higher ground, as did the miners, although with a tad less enthusiasm. This was an unusual move in that the precious metals sector generally suffers from the summer doldrums and so it raised hopes for the fall which as seasons go, is one the best for gold prices. Since August gold has tried to rally but each time the rally has petered out. We are now well into the ‘fall’ season and it doesn’t look so good for gold prices.

The HUI

The performance of the mining sector is predicated on the performance of the underlying asset and once all the costs of have been covered these stocks can move in leaps and bounds on the back of higher metals prices. The summer rally from 205 to 280 generated great excitement as it had the appearance of a new dawn. Alas, as gold and silver drifted lower so the miners followed with the HUI now down to 226. The chart below depicts just what a torrid time the miners have been through and the summer rally looks more like it is flat lining rather than making substantive progress. A re-test of the June lows looks to be on the cards and should support fail to hold then it’s a case of look out below.

HUI

Conclusion

There are many positive factors that we can look to as being supportive of precious metals such as; mints running out of product, China buying by the boat load, the printing and debasement of paper currency, the dwindling supply, the increase in premiums for physical gold, etc. As logical and sensible as these arguments are the fact remains that gold and silver are not setting the world on fire with their performance.

There could be a myriad of reasons for this lack of progress but the two that get our attention are capitulation and QE.

Gold’s progress was characterized by a steepening of the curve and a final blow off when the price had ran too far ahead of itself. A similar occurrence usually takes place during a sell off, however, this sell off looks more like a slow drift south than a total capitulation. Gold’s inability to gain traction suggests that it could re-visit and test its old lows. Should this support fail then we could experience a rather disorderly sell off.

The debasement of the US dollar via Quantitative Easing has been, in part, the oxygen for the precious metals sector. The recently anticipated move to introduce some form of tapering of the bond buying programme put downward pressure on gold. When the time came the Fed decided not to implement tapering and gold jumped immediately and then fell back just as quickly. This behavior suggests that without an increase in QE gold will be starved of its oxygen. QE is data dependent in terms of inflation and employment. The employment figures suggest that things could be better, but they are heading in the right direction so there is little chance of an increase in QE. Additionally, the possibility of tapering will not go away and will be accompanied by much in the way of speculation regarding if and when it is to be implemented.

This sector is to some extent in the hands of Janet Yellen and The Federal Reserve. If the economy takes a turn for the worse and she behaves as dovishly as she is portrayed then we could see an increase in QE. However, if the employment figures continue to show slow but steady progress, then there will be no increase in QE and then the outlook for these metals will look less attractive. Should tapering be introduced the US dollar will appreciate and gold, having an inverse relationship with the dollar will suffer.

Bob Kirtley

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