Precious Metals Bounce From Support Area

A Brief Technical Update

This is a brief addendum to our recent update on the gold sector. Since then, a few interesting things have happened. Initially, gold stocks bounced from the 61.8% retracement level of the preceding rally in spite of the fact that gold and silver weakened further. The action reversed however on Thursday, with gold and silver bouncing, while precious metals shares lost some ground again. The HUI failed at the 200 day moving average, and it remains to be seen if it once again turns into an impenetrable barrier (we believe it won't). The HUI-gold ratio has strengthened a bit recently. Note also the divergence between the HUI and the ratio that has developed at the most recent low.

HUI and HUI-gold ratio – divergence at the recent lows - click to enlarge.

HUI with Fibonacci retracement levels of the December-March rally – click to enlarge.

If the HUI can overcome both the 200 and 50 dma's, it would be a strong sign that the  recent lows represented a short term turning point. We believe this is actually a likely outcome, but this is obviously just a hunch at this point.  

Short term support in gold and silver has also held so far. In fact, recent attempts to break below these short term lateral support zones have failed and produced two inverted hammer candles in a row. From a purely technical perspective this would certainly be considered as short term positive, but there is a fly in the ointment. It is possible that Thursday's reversal was triggered by news of the deteriorating situation in the Eastern Ukraine, which provoked some Russian saber rattling and renewed sanction threats from the US. Any moves in gold triggered by geopolitical news are as a rule untrustworthy, but the fact that the bounce started from an obvious support level mitigates this aspect a bit.

It should also be mentioned that GOFO (gold forward rate) has recently turned negative again, which traditionally tends to support the gold price. This has not as much weight as it would have if short term dollar interest rates were higher than they are, but per experience it is usually nevertheless a supportive factor.

Also, contrary to what tended to happen in the past, geopolitical upheaval is these days rarely interpreted as a positive factor for the US dollar (there may be a message in that actually). Instead, the currency most likely to benefit nowadays is the yen.

The chart below illustrates the situation in gold and silver. Bulls would certainly  want these lateral support levels to continue to hold, or at least not be violated for long.

Two inverted hammer candles in a row in gold and silver. Note also the slight price/RSI divergence – click to enlarge.

Sentiment

In our previous update we showed a chart of the Rydex precious metals fund, this time we take a look at the current state of the 'public opinion' chart for gold. From an anecdotal perspective, sentiment has turned significantly more negative in recent days. Even a number of market commentators who usually tend to have a positive bias have expressed bearish views. The public opinion chart shows that sentiment obtained via surveys is roughly in the middle of its most recent range, in other words, it has simply tracked gold's price movements. This level is however at the low end of the range that obtained prior to the cyclical bear market, so it is certainly anything but indicative of undue enthusiasm (the chart depicts an average constructed from several prominent sentiment surveys).

Gold, public opinion – click to enlarge.

Conclusion:

We believe that everything still points to the fact that a bottoming process is underway. It appears to be a mirror image of the topping process of 2011/12. It may well become even more drawn out, especially as the seasonally weak period for gold is directly ahead. Keep in mind though that an eventual upward reversal could well entail a period of strength that is not aligned with the usual seasonal patterns. When the 2011-2013 decline got underway, the market also ignored the usual seasonal tendencies. At the moment upcoming developments with respect to the macro-economic backdrop are probably more important.