Before we look at some precious metals stocks I would like to show a few charts which will help explain why I didn’t participate in this last precious metals stocks rally which tstarted in December of this past year. It’s not that I didn’t want to, it’s just the evidence shows that the Dow (INDU), which I’m going to use as a proxy for the rest of the stock markets, is in a true bull market versus the precious metals stocks.
As I have often said, ”you always want to trade in a bull market vs a bear market. It will save you from a bad trade if you enter it at the wrong time. If you enter a long trade during a bear market it will be unforgiving and could take you to the cleaners before you know what hit you.”
If you were trading the precious metals sector from its 1980 high to its 2000 low it was a tough game to win let alone navigate successfully because the trend was down to sideways with just a few, brief, counter-trend rallies. This would get everyone excited only disappoint a little later down the road.
On the other hand, if you were trading the INDU during that same time period, you would have enjoyed one of the greatest bull markets of all time. So knowing which way to trade, either in a bull market or bear market is a BIG DEAL in my opinion.
Below is a ratio chart which compares the INDU:Gold going back to 1980. It clearly shows how the INDU outperformed gold going into the 2000 top.
Back then, the PM complex was way off my radar and my main focus was on big cap tech stocks. I remember reading a few analyses about gold stocks which kept harping on how overvalued the stock market was and the gold stocks were the only place to be. These analyses were eventually proven right after being wrong for many years, but the damage to PM investors had already occurred.
Now let's look at the 2000 high and the big H&S top that finally reversed this ratio in favor of the precious metals sector. For the next 11 years the place to be invested was in the precious metals complex, until they topped in 2011 which is the same time this ratio chart bottomed.
I still hear people talking about how this ratio has to go down to 1:1 before the bull market is over for the PM complex. That was the case in several instances in the past, such as the 1980 high in the ratio when gold hit 850 and the INDU was trading at the 850 area as well. Keep in mind, the only rule in the markets is there are no rules. As you can see, the ratio hit a low of 5.5 in 2011 which I believe will be the low point for quite some time.
Since it took a very large H&S top to reverse this ratio to the downside in 2000, it’s now taking an equally large inverse H&S bottom to reverse this ratio back up. The price action has been testing the neckline for almost one year now, telling us the neckline is hot and should be respected.
Below is a combo chart which has the INDU:Gold ratio on top and gold on the bottom. This 10 year weekly bar chart brings into focus the inverse H&S bottom on the ratio chart and a possible H&S top we looked at a several months ago that I labeled the potential gold H&S top, just for entertainment purposes.
Note how the rally out of the December 2016 low started at the 10 year neckline which again tells us that neckline is hot and to be respected. The bottom line is that neither of these potential massive H&S patterns has actually broken out above its respective neckline yet. Until each does, we still don’t have confirmation.
However, if they do, this combo ratio chart is strongly suggesting the stock markets are going to outperform the precious metals complex for an extended period of time because of the size of these potential H&S patterns.
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Precious Metals Stocks:
I would now like to show some individual precious metals stocks to see if they’re giving us any clues as to what to expect from this sector going forward. You may remember the many H&S tops I was showing on most of the PM stock indexes late last year, with the August 2016 high as the the head.
Many of the H&S tops were negated when the price action rallied back above those necklines, which one has to respect. Some of those H&S tops though, are still relevant on many of the precious metals stocks.
I have always said that I like trading the precious metals stocks because the universe is so small you become familiar with the individual stocks that make up the indexes. When you see some of the leaders building out a top or a bottom, you know the rest of the pack won’t be far behind.
With that said, let's look at some daily charts for many of the bigger cap PM stocks and see what they may be telling us regarding their H&S tops or possible topping patterns.
Below is ASA Gold and Precious Metals (NYSE:ASA), a large cap that's been a leader in this move from the 2016 lows. The chart shows a very nice H&S top with the backtest taking place 3-months after the breakout.
Yamana Gold (NYSE:AUY) was one of the leaders back in the early days of the bull market, but has fallen on hard times. It built out a H&S top with a nice clean backtest before dropping lower. Two weeks ago it broke below the bottom rail of the blue bearish rising wedge signalling more weakness ahead.
During the initial rally phase out of the December 2015 low, the South African miners and stocks were the leaders to the upside. Below is a daily chart for Gold Fields Limited (NYSE:GFI) which topped out in August of last year and has since declined strongly. After a short counter-trend rally out of the December 2016 low, it has now broken out of a H&S top to the downside.
With all the completed and partially completed H&S tops, I can’t in good conscience recommend buying these stocks. I know it goes against the main theme of PM investors, but the charts are suggesting this is a time to exercise some caution. For the record, I’ve been trading the PM stocks exclusively since the spring of 2002, both long and short. This is the first rally phase out of the December 2016 low, in which I decided not to participate, as I see better returns for the longer term in the general stock markets.
So Where’s the Bull?
Below is the 75-year chart for the INDU that I have to respect regardless of all the reasons why this bull market has to end, or might crash at any moment. Remember, big consolidation patterns lead to big moves and if the 13-year Jaws of Life pattern has any relevance, this next impulse leg up is just getting started. From my experience, it is what it is until it isn’t.
We're not trading the Dow per se. Rather, we've been accumulating many different Stock Market Sector Leveraged ETFs which have been identified by the charts as being the leaders during this impulse move.
This could all change in a heartbeat, but for now I have to go with what the Chartology is suggesting.