Is the Precious Metal Bear Market Over?

Precious MetalsAll Lights are on Green

Dear PGM Capital Blog readers,

In this weekend’s blog edition, we want to discuss with you the signs based on which we may conclude, that the precious metal bear market that started in April of 2013, may be coming to an end.

After the massive decline of the gold and silver price in 2013, which led prices to as low as respectively US$1,180.00 an ounce for Gold and US$ 18.68 an ounce for silver, a number of indicators might suggest that the bear market for precious metals might be ending.

In this article we’ll analyse the following key points and their effect on the price of Gold and other precious metals.

HISTORY:
As can be seen from below chart, the price of Gold dropped to US$1,180.00 an ounce for a few minutes on 28 June 2013 but has been trending up ever since, reaching as high as US$1,433.00 an oz, in August of 2013. Gold Chart

Another selling wave followed and gold dipped to US$1,182.00 an oz, on 31 December 2013, but again, bears failed to break through and gold took off toward US$1,392.00 on 17 March 2014. Since then, gold has been easing some of its gains by dropping to as low as US$1,240.00 in June of this year and to as high as US$1,332.00 on July 1st of this year. On Monday July 14, someone dumped US$ 1.37 billion in Gold futures, causing it to have its biggest drop for the year, but on Thursday July 17, geopolitical tension regarding Malaysian flight MH17, that crashed when flying over Ukraine, pushed the price as high as US$ 1,324.46 an ounce as can be seen from below chart

Gold 3-day chart

GEOPOLITICAL TENSIONS:
Global tensions (Ukraine, Iraq, Russia, Libya, Syria) showed how gold remains a safe haven asset. Recently, there was a massive number of stops that were triggered on panic buying on June 19, and July 17 2014, when respectively Iraq asked the USA for air support against insurgents and when Malaysia Airline flight MH17, was shot down over Ukraine with 295 people on board.

For centuries Gold has been considered as the safe haven in time of political tensions.

INFLATION EXPECTATIONS ON THE RISE:
Inflation expectations in the USA are on the rise and the tensions in the oil rich Middle East, will put an upside pressure on Oil prices which will function as tail wind for inflation in the World.

Due to weather conditions, climate changes, life-stock & crops deceases and increase of the world population, food prices have risen the most this year, since 1990.

Although, both food and energy are excluded from the core inflation, indirectly they both have put an upwards pressure on the core CPI.

As can be seen from below chart the USA core CPI has risen in June, to its highest level in two years and above the 2 percent target of the FED.

USA Core-CPI Chart

PGM CAPITAL COMMENTS:
As can be read from the above analysis, the fundamentals for Gold are very strong.

From a technical point of view, as can be seen from below chart, Gold has failed to break down significantly from the tight coil pattern it created over a 2-month period. 

Gold 1-year technical chart

A price US$1,280.00 an ounce will be an important level going forward for gold since it represents resistance from the coil, and is also where the 50-day moving average sits currently. If gold can surprise the bears to the upside and complete the failed breakdown things could get interesting.

What’s even more interesting than gold though is what has happened in the mining stocks. The Market Vector Gold Miners ETF (NYSE: GDX) and Market Vector Junior Gold Miners (NYSE: GDXJ) experienced only two-day breakdowns from their coils. 

These breakdowns occurred on high volume, but the buyers overwhelmed the sellers after merely two days as can be seen from the technical chart of the Market Vector Junior Gold Miners (GDXJ).

Market Vector Junior Gold Miners (GDXJ) 1-year technical Chart

In a healthy gold market you want to see gold stocks outperforming the metal, and this failed breakdown in gold at the end of May is starting to look like it is forming a launchpad for a continued move higher in gold and gold stocks.

Regarding silver, when looking at the Silver data of “The Commitments of Traders “(COT) of the US Commodity Futures Trading Commission (CFTC), we see that Non-Commercial Longs increased by 24% in the first week of July; however, shorts tumbled by almost 60% in two weeks only while the Net Long/Short ratio, increased by 4000% from a near-zero figure to a 40,299 contract.

See below chart for details.

Silver COT

Looking back at its history, it seems silver might be preparing for another bull move, like the one of 2010-2011.

In 2010, Silver Longs reached a record high in October 2010 when the price of silver was at US$21.40 an ounce. Silver advanced significantly in the following months, reaching a record high at 47.90 (weekly close) on the week of April 29 – 2011.

Please keep in mind, that past performance of a security or commodity is no guarantee for its future performance and like John Maynard Keynes said:

‘The market can stay irrational longer than you can stay solvent.”

Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that prices of commodities, precious metals and the stock of their miners can be very volatile.

Keep also in mind that prices don’t move in a straight line and that sharp corrections may happen in the short term.

Yours sincerely,

Suriname Times foto

Eric Panneflek

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