Make Kitco Your Homepage

Look For A Major Turn In Gold Soon

Commentaries & Views

In our last update, we noted that Gold Stocks had resistance in the $19.75 to $19.80 area and that the odds were about 62% that GDX could be near a short term high of importance. As can be seen on the chart below, that call was very close as the GDX actually poked up a little beyond it to a high of $19,92 for about 20 minutes late in the day before it rolled over hard.

Since then, both Gold and Gold Stocks have moved lower with Physical Gold breaking back below the key $1218 area, which we also outlined in last week’s report, today. GDx closed today at $18.87 and that is also below the $19.10 figured we noted last Wednesday. All of this to us suggests that the short-term trend is likely once again turning down and that prices will probably move moderately lower over the next 5 to 10 trading days.

However, while prices are likely to fall a bit further, we also continue to believe that we could be with a few weeks of a major low in both the precious metals and the gold mining stocks. The turning point and potential investment opportunity that could now be brewing up would rival early 2016 in its scope, and in fact, we believe could produce a triple digit percentage gain in the GDX over the next twelve months. Hence, great attention must be paid and for all investors in this area, now is the time to bore-in. We are quite excited about the potential, as we sense a major low is soon in the final phases – the lowest risk phases of completing.

Over the very near term, we believe that we could see a one or two day bounce on Wednesday and Thursday of this week toward initial resistance at the $19.10 to $19.15 area. This is likely to be a kind of weak bounce. From there, we would look to see if GDX presses a bit lower into early to mid-next week toward the $18.10 to $18.30 zone. That would be an area where we then set up a range between $18.20 and $18.80 which could then be followed by a final sell off toward $17.40 near the end of this month, or early January which could ultimately turn out to be a world–class investment opportunity. So to characterized this as best we can: --- We are likely not there yet, but our general sense is that prices are in the act of weakening toward something that will be either a close approach of the former lows, or a full retest of the former lows, followed by a turn to the upside that could be one for the record books.

Whiel there are many details we can delve into in the days ahead to start spinning a tight analytical web, what we are trying to relate can be broadly summarized by the chart above. Here we are not trying to present a precise forecast, merely trying to help our readers understand the concept of a “W” type bottom. “W” bottoms are exceptionally common at major lows, and usually, the panic portion is on the “left side” of the W These wre the panic lows of August 16th as GDX plunged to $18.15. Then, following the “left side” panic, there is nice counter-trend rally that lasts a few weeks and usually lifts prices back toward the declining 50 day average. That is exactly what happen this time, with the 50 day average declining on a strong downward slope as prices bounced back to contact it. Now, normally, the text book version of this is a slower paced, but still steady decline that makes up the “Right Side” of the “W”. On the right side, prices can either match or closely approach the prior lows. In our view, we believe some indices like XAU will likely make a new low, while HUI could match the lows, while GDX could end up closely approaching the prior low, but holding just above those lows. Using GDX, by our broad reckoning, we would be about half way down toward the final low today. The rest of the decline Is likely to look like some additional slow and erratic slippage heading in the year end Christmas Holiday. In theory, the decline could even spill into early Jan 2019. That said, what we will be watching for will be another round of oversold values on our technical indicators along with key bullish divergences. Then once prices do turn up, we will look for all our major trend following models kick in with cyclical “BUY” signals and from that point, we will simply surf the wave. These kinds of patterns, when they build out well and then reverse to the upside, can generate very strong returns for 12 to 24 months.

In the present circumstance, we strongly believe that GDX is in the final phases of completing a deep Primary Wave [2] retracement to the Primary Wave [1] advance which took place in early to mid-2016. That Primary Wave [1] advance clocked in at 156.37% in 7 months, spanning the January 22, 2016 low of $12.40 to the August 12th weekly high at $31.79. Looking ahead, a Primary Wave [3] advance should soon be directly ahead and that should be an order of magnitude higher in both percentage gains and total time involved. Thus, in our view, it would not be unusual for the Gold stocks to rally well into 2021 with prices well above $50 to $60 on GDX. Indeed, prices could go even higher than that, but that is just a fun conversation for another time and day. The real point here is simply, we could be coming into a very important low and the turn here could be a secular turn, meaning a once a decade type opportunity and very well worth the time for most investors. Certainly, the gold stock investors deserve a little relief as this has been a long suffering decline. In our view, a key potential catalyst for this kind of reversal may well be a stock market bear market that ultimately precipitates a substantial global economic contraction causing the Federal Reserve to shift policy from tightening to easing. That shift, could in turn weaken the Dollar and help Gold. So in our mind, we see this turn in Gold as likely connected to a sea-change in the larger investment landscape. In the end, we believe a deflationary bear market will arrive sending interest rates down to record new lows. At the moment, all of this seems a world away, as most economists are lauding the U.S. economic strength, fear is of rising inflation and rising rates, not deflation and falling rates. At the present, we have King Dollar, and a crowded trade at that. So a lot of water has to go under the bridge here before any of these changes become more readily apparent, but Gold usually leads and the recent stock market action seems to be packing the kind of downside punch that could be seen as the early onset of a longer-range change in trend. Right now, a number of analysts on TV believe that a reversal in Fed policy from the recent correction could be in the offing and could help the stock market. While this is certainly possible, it is worth remembering that on several major occasions in the recent past, a turn in Fed policy was only the beginning of serious problems for the equity market. In our view, more time is definitely needed, but the recent volatility surge suggests that the financial floor tectonic plates are now starting to shift and we think Gold could soon emerge as a prime beneficiary.

Above: XAU and the GDX Super TRIN or ARMS Index. We have a potential situation in the making where prices could be matching or closely approaching prior price lows in the weeks ahead, and Super TRIN could be setting up a sprawling positive-divergence by making a lower high. “Positive Divergences” like this one, are the potentially a key ingredient that could super-charge an ensuing rally and we will be watching for these carefully and covering them in detail in the weeks ahead if they potentially develop. On the next page, we show the McClellan Oscillator for Gold Stocks and the Short Term Ratio of Up-to-Down Volume, both of which are moving down toward oversold territory, with neither of their quite yet.

As of last night, the McClellan Oscillator for Gold Stocks closed at -127 (with -250 the oversold benchmark) and the Short Term Ratio of Up to Down Volume closed at .765 with .50, the classic oversold benchmark. The Medium Term ARMS closed at 1.187 with 1.65 as the upper oversold threshold, and the Medium Term A/D Oscillator at -7.76, with -30 the classic oversold condition. So all gauges still have room to go on the downside here in the short-term. That’s all for now

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.