It’s
been a boring few months in the gold market, up until recently. It’s actually
been a boring few months in most markets. The basic theme has been, Dollar up, everything
else down. If the Dollar is correcting, everything else has a nice little
rally, then the “everything bear market” resumes again. But there have been some signs of life
recently in a few things, and as most know, the signs of life I am paying
closest attention to of course, is gold.
While Gold itself has been a bit shaky recently, testing back to its lows and even briefly exceeding them on Thursday after the Fed rate hike, we haven’t seen a new low in Silver since Sept 1st, over 2 months ago. Miner’s kept underperforming for another few weeks though, with GDX, GDXJ and SILJ making lows on Sept 26th. Then, all 3 rebounded pretty nicely only to fall back down again, but like silver, they did NOT make new lows.
Now,
to an extent, this could be expected. After all, silver and miners had underperformed
gold drastically over the last year and a half or so. The Gold/Silver ratio bottomed
in Jan 2021 at 62 and was still at ~68 in June 2021 when I first became bearish
and issuing warnings. Two months ago, in early September, it reached 96. The
only other time in almost 25 years that it was higher than that was the Covid
Panic in March 2020, when it reached 125 but only stayed above 100 for 3 months.
It's
worth noting, while that was the highest the GSR has ever been, it did reach
nearly 100 in both 1991 and 1941 as well, so this is the 4th time in
over 100 years it’s ever been at these lofty heights nearing 100:1. (You don’t necessarily
need to be wildly bullish silver to see the benefit of favoring silver vs gold
here. Additionally, you don’t need to see the ratio drop to 20:1 to profit from
it. 1 oz of gold now could buy you almost 100 ozs of silver. At a 65:1 ratio,
where we were just 18 months ago, you could trade back 65 silver ozs for your 1
oz of gold and keep 35 ozs of silver for free. My site is called “Alchemy
Financial” because I like the idea of turning “paper” into gold. The only thing
more appealing to me then turning paper money into gold, is to conjure free
metal out of thin air.)
So,
it was overdue for gold to play “catch up” and begin underperforming versus silver
for a bit. From that standpoint, nothing unusual there, right? No, nothing unusual
per say, except that historically it is much more common that silver is
outperforming gold because the tides are shifting, then it is just because gold
is “catching up” to silver and miner’s weakness. That was the first bell to
ring for me.
The
next bell was when we take a closer look at the technicals in gold. As we
started to make a double bottom in gold around Oct 20th, RSI was
significantly higher this time around then the first low at 1620 nearly a month
earlier (36 vs 26, and higher again on the 3rd test on Thursday,
holding 40). In fact, RSI had stayed above 40 since the beginning of Oct, only
dipping below that level for 2 days, Oct 19 and 20th, then moving
back above it sharply on the 21st. Nothing is ever picture perfect
in technical analysis, but that is close enough for me to consider it “holding
above RSI=40.”
If
the short-lived dip below RSI 40 that quickly rebounded wasn’t convincing
enough, looking at silver helped solidify that “close enough” RSI view. As
Silver consolidated, bottoming repeatedly at 18, RSI, which was 28 in early Sept,
had been holding above 40 on corrections ever since then, twice as long as it
had been for gold. Both GDX and GDXJ had poor price action, testing nearly back
to their Sept lows, but both also saw RSI stop DEAD at 40 on corrections and
bounce higher, holding above that level ever since those lows were printed.
SILJ fared better than silver, GDX or GDXJ. RSI held closer to 45 on dips over
the last few weeks and there was noticeable positive divergence in RSI as well,
going back to May. We can also see higher lows in MACD on Gold, silver, GDX,
GDXJ and SILJ building for months, coming right up to the 0 line then dipping
back down.
As
well as having positive divergence in MACD on silver and miners, and holding
RSI above 40, we can see 2 “fake out” moving avg cross overs on silver, one in
Aug that fell back down, another in Oct that collapsed as well and a 3rd
now. Other than those 2 previous fake outs, this is the first moving average
cross higher since February. Silver gained $4 in the next 5 weeks after that.
We can also see those moving averages have met on GDX, GDXJ and SILJ, all
looking to cross higher as well. Again, this is the first time in all the miner
ETFs since Feb. After that cross over happened, GDX gained 30%, GDXJ gained 27%
and SILJ gained 25%.
I
will apologize for some redundancy to long time readers and followers, but I want
to reiterate and explain a few things for those who may not have heard me talk
about them before, or anyone who may not be familiar with a few key things I
look at and some of the technical analysis jargon.
First,
In my observations in Gold over the last 14 yrs, and the history of it’s market
action that I have studied beyond just my experience, I have found a formula
that typically exists whenever precious metals are trending higher. What we
typically see is silver outperforming gold, gold miners outperforming silver,
Jr gold miners outperforming majors. (Silver miners typically should perform inline
with Jr gold and quality silver jrs have a tendency to outperform all of them).
So the formula is:
Gold<Silver<Major Gold Miners<Jr Gold
Miners
If
you look back at most times when gold was trending higher, you will find this
to be the case. Inversely, at times when metals are doing poorly, it is typically
the exact opposite. Jrs perform the worst, majors, especially the ones who pay
dividends do a bit better, silver outperforms the miners, who are leveraged to
metal prices, and gold performs the best, as it is the “safe haven asset.” When
we see this formula begin to shift one way or the other, it’s likely the trend
is changing as well. This is why the outperformance of the last couple weeks in
miners and silver vs gold is significant to me after such a horrid decline for
many months.
Another
thing I mentioned is RSI “holding above 40”. In assets that are in bull
markets, or are generally trending higher, it is typical to see RSI hold above,
or bottom at 40 on corrections. At extreme points it can get very overbought.
In bear markets it holds below, or tops at 60 and can get very oversold for
periods of time. Here are 2 past examples I’ve shown before, a bull market (Macy’s)
and a bear market (Ford).
Another
note is MACD. While many like to focus on the MACD signal line crossing the
moving average as a “buy” sign (Or a sell sign when it crosses below) the cross
above or below the 0 line is what provides the best, long trending entries. Note,
on this GDX chart going back to 2020 if you were to buy or short simply on the
cross of MACD above or below the 0 line. Look at how long and consistent the
trend higher or lower was vs trying to jump in every time in made a moving avg
cross. Buy at the cross above 0 line, hold so long as it stays above. Short at the
cross below 0 line, hold so long as it stays below. Take profits on extreme spikes
and drops.
In
addition to 0 line cross over buy and sell “signals” from MACD, it can also
present us clues on trend changes in terms of “divergences”, which is when
price makes a higher high, but MACD does not, or price makes a lower low, and
MACD does not. There are 2 negative divergences (red lines) on MACD here that
signaled the uptrend was going to break down and both times it did. There are
also 2 positive divergences in MACD (green lines) that signaled the downtrend
was about to turn and a rally was building. Both times that’s exactly what
happened. Right now, we are building a much bigger positive divergence in MACD than
either of those two last ones, that is going all the way back to May this year
after a nearly 50% loss in 6 months.
So,
take all of those points and add them together. That is actually exactly what
the model I spent the better part of 10 years building does. It analyzes all of
those points (and a few more) and weights them in accordance to what I feel is their
importance in predicting a bottom or turn in gold and miners. Then it gives a
value between 0-100. When that value has
been ranging below 50 for a period of time, and then begins to consistently
start showing values above 60, then we are beginning to see an indication a
bottom is forming. For reference, 2 weeks ago it showed values above 60 multiple
times for the first time in 6 months. On Friday, it jumped to 76. THAT is
significant.
If you’ve been following and reading for the last few years, the model has been remarkably accurate at timing the major bottoms and pretty good at signaling to get out of the way as things turned lower. We got “buy” signals Nov 30th 2020, March 2nd 2021, Oct 1st 2021, and Jan 27th 2022. We warned “all is not well” and got bearish late June 2021, Early Dec 2021, and May 2022. (All of which is documented, and time marked on tweets, articles and interviews, feel free to audit it all for yourself.) The model is not built to “predict” tops and has done a poor job doing so, but it is built to give logical profit taking points.
For example, one such instance came on March 10th 2022. As gold and
miners moved very strongly higher, we got very high values in the model that suddenly
“slipped,” which is a strong indication to take profits. That was 2 days after
gold peaked. GDX was 38. Over the next 6 weeks GDX kept climbing, but the
values in the model never returned to their peaks. GDX peaked at 41 then collapsed.
You had a period of time of strength to continue to periodically sell into, but
in terms of “logical profit taking opportunities,” as opposed to “calling a top,”
that was about as good as it gets. (We also saw DSI levels on gold and silver reach
93 and 95. Add that into the mix and you can feel pretty confident selling at
those points.)
There
are a couple of other points I want to mention. First, back to the Gold/Silver
ratio. After breaking October’s low last week, it is now back to levels last
seen in April, at 80. More importantly to me, the moving averages here on the
weekly chart are crossing lower, the first time this has happened since July
2020. At the time, the GSR was about the same level it is now, around 80. Over
the next 7 months it dropped to 62. Looking
at the daily chart, once again we can see the importance of markets that are
trending higher and RSI staying above 40. It did so while it trended up from
March until September. Then, it broke sharply below 40. The moving averages on
the daily chart gave a bearish cross lower, price made lower lows and on this
final rally higher in mid October, (a rally that reached a higher high than the
late September rally) RSI moved up to 60, stopped dead, reversed and is now
below 40 again. This has all the markings
of an uptrend that has peaked and is about to turn lower. And GSR heading lower
has a close to perfect correlation with a general uptrend in Gold, silver, and
miners.
On
the subject of ratios, there is also the GDX/GLD ratio. Which is currently
consolidating at level that we have only seen it go below twice: The 2015 bear
market bottom, and the Covid crash in March 2020. Now of course, that doesn’t
mean we couldn’t test these levels again or even break them, but it SHOULD make
you begin to consider, “Where does the higher risk and higher reward lie? In being long here or being short here?” On
the weekly chart we can see price consolidating at the 78% Fib retrace from the
March 2020 low to the Aug 2020 high. Additionally, we can see a SIGNIFICANT “gap”
between the 2 moving averages. In 7 years, the deviation between these two moving
averages has only been this large 2 other times. The March 2020 Covid crash and
the 2015 bear market bottom. Looking at RSI, we are recovering from oversold
levels, slowly creeping higher as price consolidates, in a very similar fashion
to how it did in the 2015 bear market bottom. In fact, those “oversold” levels
on RSI were only hit 3 times before, 2015 bottom, 2018 bottom and the 2020
covid crash.
Flipping
over to the daily chart, there are a few other interesting points. First, we
see the same action as we do in GDX and GDXJ regarding RSI. We have held the 40
level since late Sept. It has been held back on rallies when it reaches 60, but
breaking 60 is step 2. Step 1 is that we are holding above 40 on pullbacks
which it hasn’t done in some time. Something else the ratio may be clueing us
in on is that we have the first moving avg cross higher since February. We had
a strong drop after the cross, but also a strong rally Friday that puts price
back above both moving avgs which will keep them trending higher. (Should also
mention, we had pitiful performances from ABX and NEM after earnings announcements
last week, which put a very big hinderance on GDX, so underperformance for a
few days there when looking at the GDX chart or the GDX vs GLD chart, should be
taken with a grain of salt as those 2 stocks make up 23% of the GDX.)
Looking
at the orange box on the daily GDX/GLD ratio chart, we can see some
similarities to now. We consolidated at the 50% Fib retracement from the March
2020 low to the Aug 2020 high. Today we are consolidating at the 78%
retracement. We got a moving average
cross over in late Oct, (Same as this year), then came back down to retest lows
and consolidate some more. The already quiet market got quieter and more ignored
during the holiday season as it bounced around, then it took off. If history
rhymes here, we may be a bit early in getting bullish, but I’d rather be a couple
months early than a couple weeks too late. We could see lows retested and this quiet,
ignored market stay quiet for a bit longer, but in terms of quiet consolidations,
this is exactly the type that you see at major lows.
I
have been looking at Christmas as a likely time for a bottom in metals and
miners for a few reasons. One, is tax selling, which we are bound to see this
year after such a poor performance. Another reason though is because all
through the bear market from 2013 to 2018, we saw 2 major lows each year and
they were very consistent from a cycle standpoint. One major low each year came
around early July and one came around the end of the year. Last year, GDX hit a
low Dec 15 and retested it in late January this year. We took off in February.
We also got a small bottom and rally that occurred right at the beginning of
July this year. Note this Gold cycle chart below from 2013 to 2018 and how
closely major lows aligned to those periods in July and around Christmas. Then
note the lows in Jan and July this year on the current chart. Perhaps history
continues to rhyme, and this bottom cycle is one that gold likes to play out
when its in a bear market.
One final point, and it may very well be the most important of all of them. Two weeks ago, the dollar sold off HARD and all the bears were there to claim victory and pronounce its death for the 10 thousandth time. Within days it was ripping higher and then the bulls were back to being complacent with the trend they have come to rely on all year, DXY up, everything else down. In such a short order it seemed like everyone, no matter bull or bear on DXY, got a big surprise. There is a good chance there is about to be another one. This time for the bulls, again.
DXY has been another great example of uptrends holding RSI 40 on
dips. Notice, there was no clear trend in DXY from Fall 2020 to Summer 2021,
just sideways action. Simultaneously, RSI ranged from 70 to 30 and back again,
no clear indicators of a trend there either, but as soon as the dollar began
making higher lows and higher highs in Summer 2021, we also saw dips holding at
40 on RSI and reaching very overbought levels at peaks. It’s kept that up for
18 months. The drop that had bears so excited didn’t push below 40 on RSI, nor
did it break this uptrend line, but it’s the rally that followed that had alarms
ringing to me, (and why I have said before to pay attention to the “reaction
after a big move”.)
RSI
stopped DEAD at 60 and turned lower.
We
haven’t broken the uptrend line yet, we haven’t broken 40 on RSI on the
downside, but that reversal at 60 may be the canary in the coal mine for DXY.
Now, does this mean new lows for DXY, or just a consolidation in the uptrend,
or a pause and correction? I don’t know and neither does anyone else, contrary to
what they may try to convince you of. What does matter to me though, is that
even if this is just a pause and consolidation here, it could give enough space
for gold and miners to have a very nice run in the coming months. One more factor
to weight with all the other positive signs for metals right now. And it could
be a very big factor as well.
On a quick personal note, I want to thank everyone for their kind words and well wishes when about a month ago I had mentioned I was in the hospital and was having some significant health issues. The last few months have been a very difficult time in my life and continues to be, but things are improving. I am not one to typically share personal things, so when I do it is usually significant. Although it is often said sarcastically, I truly do appreciate everybody’s “thoughts and prayers” and it is great to be back writing about the gold market again, especially as it now looks like it’s about to get fun!
In
closing, everyone is always asking me the same question, so I’ll address it yet
again. Is this THE bottom? I don’t know
and neither does anyone else, no matter how much of a Guru they claim to be or
how many twitter followers they have. No one has a crystal ball, myself
included. Will this rally send gold to 2,000, 3,000 or maybe just 1750? It
doesn’t matter too much. We all have our thoughts and reasons why behind them, but
it is mostly a waste of time pontificating too much on “how high is up?” in my experience.
We get the indications to buy and that’s
what we do. When we get the indications to take profits, we will do that too. When
we get the indications to get out of the way, we will. It’s what we’ve been doing,
and it’s worked quite well. The moral is the tide is turning so we’re
positioning to catch the wave and ride it for however long it carries us. That’s
the signals we’re getting TODAY. Let’s worry about tomorrow when tomorrow
comes. Till then, stay safe and out of leverage. This market storm may not be
over, we may just be in the eye of it.
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