Please try another search
Gold’s reversal from $1130 to $1200 combined with sharp rebounds in the gold miners has given precious metals bulls some hope that the bottom may be in. A few weeks ago we noted that the sector was extremely oversold and a snapback rally could begin. Gold has been the tell for the bear market and a real bull market throughout the precious metals complex may not begin until Gold’s bear has ended. In this editorial we dig deeper into some things to watch as they pertain to Gold.
First we will focus on Gold’s volatility. The chart below shows Gold and two volatility indicators: the CBOE volatility index and average true range. Peaks in daily volatility have coincided with important peaks and troughs in the Gold price. Volatility declined from summer 2013 through summer 2014 before perking up as Gold declined from $1255 to $1130. Yet both volatility indicators are not close to extremes. Volatility does not necessarily need to reach an extreme to signal a bottom. However, the two biggest volatility spikes were at the 2008 bottom and 2011 peak. A sharp decline in Gold below $1100 towards major support combined with a spike in volatility could signal a major turning point.
I’m also focusing on the COT as it's an excellent sentiment indicator. By some metrics (objective and anecdotal) Gold’s bear market has reached extreme territory. However, the COT is presently not at an extreme. We plot (as a percentage of open interest) the net speculative position and the gross short position. If these readings can exceed the 2013 extremes then they would be at 13-year extremes. A spike in the gross short position, while negative in the short-term provides future fuel (short covering) for a very strong rebound off the bottom.
Meanwhile, let’s not forget Gold’s relative strength. We shared the importance in a recent missive. We noted Gold’s relative strength tends to perk up before Gold itself bottoms. The chart below plots Gold against a foreign currency basket (the inverse of the USD index) and Gold against the S&P 500. Gold is holding up well against foreign currencies but is coming to an inflection point. I don’t think its going to breakout yet but I could be wrong. Meanwhile, Gold continues to be very weak against the stock market.
Gold has been the tell for the bear market and my work leads me to believe the bottom is ahead and not behind us. Last week we noted the likelihood of a test of major support near $1000/oz rather than a bottom at an arbitrary level. In addition, Gold has yet to have a volatility spike on par with the spikes at the 2008 bottom and 2011 top. Moreover, current positioning in the futures market remains below the extremes seen in 2013. Finally, Gold has more work to do on the relative strength front before it can sustain a recovery.
All this being said, it is important to keep an open mind to various possibilities. Silver and the mining stocks are totally bombed out and we should pay close attention if they retest their lows. The weeks and months ahead figure to be enticing and exciting for precious metals traders and investors. Expect quite a bit of day to day volatility as we see forced liquidation and occasional short covering. Be patient but be disciplined. As winter beckons we could be looking at a lifetime buying opportunity. I am working hard to prepare subscribers.
Homeownership is the quintessential American dream, but it’s become increasingly elusive for many households. A multitude of factors, including soaring home prices, elevated...
Crude oil rose about 4% last week with WTI taking out the $80 and Brent the $85 barrier, reaching levels last seen in November. Factors supporting oil prices include optimism over...
Brent Crude traded over $86 a barrel posting a new high price for the year as bearish narratives around oil and demand and the fallacies of the energy transition have started to...
Are you sure you want to block %USER_NAME%?
By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.
%USER_NAME% was successfully added to your Block List
Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.
I feel that this comment is:
Thank You!
Your report has been sent to our moderators for review
Add a Comment
We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:
Enrich the conversation, don’t trash it.
Stay focused and on track. Only post material that’s relevant to the topic being discussed.
Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.
Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.