PRECIOUS METALS SECTOR update - the BIGGEST OPPORTUNITY SINCE LATE 2015, and the LAST CHANCE AT THESE PRICES...
originally published Saturday, July 15, 2017
We’ve had to wait 18 months for an opportunity as big as the one we saw late in 2015 to appear again in the Precious Metals sector. “Wait a minute”, I hear you say, “prices were generally lower back then at that low than they are now, so how can it be as big an opportunity, as leverage is reduced?”. Here are the reasons, one technical, the other fundamental. When prices rose out of the late 2015 low, which was the Head of the Head-and-Shoulders bottom shown to advantage on the 10-year chart for GDX below, they were destined to retrace to mark out the Right Shoulder of the pattern, which is what now has most investors very negative towards the sector again. This time they don’t have to – they can now rise out of this trough and proceed to break out upside from the entire pattern to embark on a mighty bullmarket. The fundamental reason is this – most investors have been taken in by the specious Central Bank talk about “normalizing interest rates” and scaling back their bloated balance sheets – but they haven’t got a cat in hell’s chance of doing this – why? – because debt (and associated derivatives) has expanded to such gargantuan levels, that any attempt to bring it under control will send interest rates skyrocketing. Because of this stark reality, they are left with only one option – to inflate the debt away by monetizing it, which means inflation. Once investors grasp the inevitability of this – and that this process will soon get underway with a vengeance, gold and silver will soar. That is what the charts that we are going to look at today are telling us, and it means that we may never see the bargains in the Precious Metals sector that are now available ever again – or at least not for a very long time.
The rotten sentiment towards the PM sector is amply illustrated by the latest Gold Miners Bullish % chart. At just under 18% bullish, it is a little above the levels seen before the sector rally early this year, and at about the same level seen before the big rally during the 1st half of 2016. This clearly points to a sizeable advance by the sector soon.
Next we look at a 3-year chart for gold. At first sight this does not look very encouraging as it looks like there is room for gold to fall further to last December’s low, or further down to the December 2015 low, but of course, if gold is marking out a Head-and-Shoulders bottom in the manner of GDX, which it is, as can be seen on its 8-year chart in the last Gold Market update, then we would expect it to turn up from around where it is now. Now we will look at the latest COT to see why it is likely to.
On gold’s latest COT chart we can see how Large Spec long positions have shrunk dramatically over the past 6 weeks to a low level, and since the Large Specs are habitually wrong, this was almost a necessary prerequisite to a strong advance. The question we want to answer is “Have they dropped back enough now to lead to a reversal and the start of a major new uptrend?” The answer to that is yes, they probably have. For one thing, silver’s COT readings have already dropped back to their levels at the low of December 2015, which provides circumstantial evidence that gold’s readings do not need to drop back any further. Secondly, we would not expect gold’s COT readings at the Right Shoulder low to drop back as low as they were at the low of the Head of the pattern, because that was the low for the cycle and the end of the bearmarket. Current readings are therefore thought to be low enough to synchronize with a reversal.
Now we turn to silver, where we will see that despite weaker price action recently, COTs are even more bullish than those for gold. While silver looks considerably weaker than gold, as it has dropped back close to its December 2015 lows, which gold hasn’t (it is still quite some way above them), we should remember that it is normal for silver to underperform gold in the late stages of bearmarkets and early stages of bullmarkets. As we observed in the last Silver Market update, the spike down about a week ago on high volume looks like a final “capitulation”.
The latest silver COT chart reveals that Commercial short and Large Spec long positions have shrunk steadily in recent weeks back to levels that are now very low indeed. In fact they are at the same levels as in December 15, as you will see by looking at the earlier COT chart stacked beneath the latest one below – and we know what happened after that – there was a blistering PM sector stock rally that saw some stocks make huge percentage gains, like Coeur d’Alene (now named Coeur Mining Inc) which rose more than 8-fold. Of course, we won’t see such big percentage gains this time round, at least not immediately, as we will be coming off a higher base, but we ought to later because the PM stocks sector indices should proceed to break out of the top of their respective Head-and-Shoulders bottom patterns to enter a major bullmarket growth phase.
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Finally we will take a quick look at the latest Silver Optix, or optimism chart, where we see that investors are at their most pessimistic towards the metal since the bottom of the bearmarket in 2015, just before a big sector rally. This obviously augurs well for the sector since the majority are always wrong.
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Posted at 4.10 pm EDT on 15th July 17.