Are The Precious Metals Stocks Bottoming Or Just Taking A Breather?
This essay is based on the Premium Update posted December 30th, 2009.
The end of the year is usually calm on the capital markets. The volatility is low, as the money managers from all over the world take some time off and spend the Holiday Season with their families. At the same time, the end of the year is a perfect time for summarizing and reviewing this year's actions and making key decisions regarding the next year. The beginning of this essay will not be any different; especially that this is the year during which the Premium Service has been introduced on my website, so I believe that a brief review on this year's performance would be quite useful.
However, I realize that you are reading this essay because you would like to know my thoughts on the current market situation on the precious metals market, not necessarily to examine my track record, so I will limit the summary in this essay to just one of the recent events, and you will find the rest of the summary on my website. I believe you will find it very interesting.
The event that I would like to tell you about is the recent top. On November 27th, six full days before gold hit its peak and began its subsequent decline, I sent out a Market Alert (it was sent out on the same day that the Premium Update was posted, because I wanted my Subscribers to be able to take action before the marked closes on that day). I wrote:
If you are still long gold/silver/PM stocks with your speculative capital it may make sense to exit your positions now. As mentioned above, there is a chance that the PM sector would get higher on a short-term basis, but the overnight weakness in metals (...) is a strong bearish signal, so staying out of the market for the next several days/weeks (speculative capital) seems justified. There is an old saying that goes "when in doubt, stay out."
The scenario played itself out according to the script I wrote in the Market Alert. On the day of the alert, November 27th, gold closed at $1,172. It went up for another four trading days to hit a high of $1,224 and to close at $1,207 on December 3rd. The decline since then is history.
There is no magic in what I do. I have no crystal ball. What I do have is training, knowledge and experience in many of the areas crucial to from the point of view of a Precious Metals Investor: macroeconomics, statistics, (behavioral) finance, monetary policy, risk management, modern portfolio theory, and most of all in studying the charts and interpreting the signals. More importantly, I love what I do and I do it with passion and diligence.
Thank you for having taken this exciting journey with me this year. Thank you for your confidence, and your invaluable feedback. I will strive to read the map for you and guide you through the sometimes treacherous terrain in 2010 as well as I did in 2009.
So, what's in store for us next year? Let's turn to the charts to begin to gather the signs and clues (charts courtesy of http://stockcharts.com).
This week I would like to focus on the precious metals stocks.
Metals often move along with the corresponding equities, so it is usually useful to analyze the PM stocks, even if you are not inclined to trade them.
There are virtually no changes in the long-term picture of the HUI Index, so I will just paste my last week's comments, as they are up-to-date also today:
Please take a look at the thin blue lines coming from the same price/time combination. Each of them was pierced, before the final bottom was put in, and this is what I expect to take place this time.
The very long-term support line has just been touched. The HUI Index even moved below it on an intra-day basis, but finally closed above this level. (...) taking the historical performance of the gold stock sector, it seems that PMs will need to move a little lower before putting in a bottom. The short-term chart confirms this.
The cyclical tendencies are not only visible on the silver market, but also in PM stocks (here: the GDX ETF), and the USD Index. On the above chart, they suggest that the next turning point will emerge in January, most likely in its early part. Taking into account the shape and direction of the current move, it seems that this is going to be a bottom.
I've marked the area that I believe that is likely to stop the current decline with a red ellipse. The $40 - $42 level is likely to stop the move, because it includes two support levels that have already stopped declines in the past (in October and November), and also because it would perfectly fit the zigzag shape of the decline - I've noticed that declines on the precious metals market (especially in PM stocks) tend to take this particular form.
Moreover, the Fibonacci retracement level of 61.8% is also within the are marked with red ellipse - just above the $42 level.
The analysis of the PM stocks with emphasis on their performance relative to other stocks provides us with similar implications.
The GDX:SPY ratio describes how did the gold stocks perform versus stocks from other sectors. The ratio has been consolidation through the whole 2009, but that doesn't necessarily mean that the probability that PM stocks will move higher is the same as the probability that the main stock indices will. Why? Because of the fundamentals, which are the thing that drives the prices of every asset class in the long term.
The most important fundamental factor for PM stocks are PM prices (poised to rally), while the fundamental factor for the main stock indices is the health of the world economy. Clearly, the PM stock Investors are better positioned in the long run than Investors purchasing mix of all other shares.
So, why didn't the ratio move higher during 2009? Taking a broader perspective allows me to answer this question. The probable reason is that this ratio has formed a massive rally a year ago, when it moved from below 0.2 to 0.5 in just four months. Such a dramatic move requires a significant breather before a market is ready to move higher.
It currently seems that this ratio will need to move a little lower - to 0.39 level before a bottom is reached. This means that PM stocks and also the rest of the PM market is likely to move lower in the short term.
The last but definitely not the least signal (or rather the lack of the signal) comes from one of our own indicators (designed to signal turning points).
Last week I wrote the following:
Please note that the majority of bottoms were not reached until there was a confirmation from the above indicator. There was no such signal so far, which means that the bottom is likely to be put in the (most likely not too distant-) future, and that it didn't take place yet.
This week we have not seen the confirmation signal either, so it seems that the major bottom is still ahead of us. Once I get a confirmation, I will send out a Market Alert to my Subscribers.
Summing up, the precious metals market is currently in the "close to the bottom" mode. The key question is how close is "close enough for you" to enter the market. The answer depends on your individual preferences. Long-term Investors may want to purchase PMs and corresponding equities right away, regardless of the fact that the bottom may be formed in a few weeks. While this may seem careless at the first sight, I assure you it is not. The calculations behind managing large amounts of money in a strong bull market point to the fact that the true risk is to be out of the market.
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Thank you for reading.
Wishing you a happy and very profitable New Year,