It Could Not Look Better For Precious Metals Sector Going Into 2015

Technical Analyst & Author
December 30, 2014

In this article we are going to look at compelling evidence that the Precious Metals sector is either at or very close to a major bottom, and see why the chances are high that the sector will rally strongly in the New Year.

You have all heard the old adages about “buying low and selling high” and how the time to buy is when there is “blood running in the streets”. Never have these adages been more applicable than they are now to the Precious Metals sector, where even the most diehard bulls have had enough and thrown in the towel.

The abysmal sentiment towards the sector is starkly illustrated by two of the indicators that we will now look at. The first of these charts shows the Gold Miners Bullish Percent Index, going back 7 years. On this chart we can see that only on two other occasions in the history of this indicator has sentiment towards gold stocks hit rock bottom at 0% as it has in recent weeks – once late in 2008 when the sector bottomed at the trough of the broad market crash and again in the middle of 2013, after which there was a rally before prices ran off sideways for over a year. When you get readings this low it basically means that there is no-one left to turn negative, and no-one left to sell. By itself this bodes well for the sector.

bullish gold miners

In further support of the contention that we are at or close to a major low is the 20-year chart for the ratio of the large stocks XAU index over gold which is at record low levels. The rationale behind this being bullish is simple to understand – when investors are fearful towards the sector and negative on it, they favor bullion over stocks, because they figure that while stocks can go to zero, bullion cannot, and they are right about that. What they are not right about is being fearful when everybody else is fearful – which means there’s no-one else left to get scared and sell, as is the case now. When this ratio is at a negative extreme as now, it means that the mob are extremely and universally negative – and that has to be bullish. Right now this ratio is at astoundingly low levels – way below the levels it was at late in 2000, right before the start of the great gold and silver bullmarket, and at the depths of the 2008 market crash – Precious Metals stocks have already crashed and are friendless.

gold price chart with xau

Finally we have another powerful indication that the sector is bottoming in the volume pattern of junior mining stocks, expressed collectively in the form of the Market Vectors Junior Gold Miners ETF, GDXJ, whose 4-year chart is shown below. On this chart we can see that volume in GDXJ has ramped exponentially all this year to extreme levels, that must signify a bottom, because the sellers must by definition be “dumb” because they are obviously selling at a massive loss – so who is doing all the buying, taking the other side of the trade? – Smart Money, that’s who. The enormous recent volume in this is evidence of a massive transfer of stock from weak to strong hands, and since the new buyers are not going to sell until they have turned a profit, it is easy to understand that immediately an uptrend takes hold, new buyers are going to find no stock available and will have to drive prices sharply higher to get their orders filled.

gold price market vectors

Does this mean that most junior miners will survive? – sadly, it doesn’t – hundreds of junior mining companies can be expected to fail next year – it’s too late for rising stock prices to save many of them. What the volume in GDXJ is telling us is that Smart Money is looking beyond the cull to the New Dawn that will follow, when the better junior miners, especially those that are in production or close to going into production, will reap the benefits of having hunkered down and pulled through a very difficult time, which will be magnified by the extra savings resulting from low oil prices, with fuel being a major component of mining industry costs.

The worries about deflation dragging the sector further into the mud are a “red herring” – gold does well during deflationary times as old timers like Richard Russell will recall from the experience of the 30’s. So if we do see deflation, it should not prove to be a problem for the sector.

Finally, end of year tax loss selling will be over this week, so we are at a good point for a sector rally to start, as was the case last year.

The conclusion to all this is that we appear to be at an excellent point to buy the better mining stocks, and you shouldn’t have to wait too long before investments in the sector start to pay off.

Clive Maund

Clive P. Maund’s interest in markets started when, as an aimless youth searching for direction in his mid-20’s, he inherited some money. Unfortunately it was not enough to live a utopian lifestyle as a playboy or retire very young. Therefore on the advice of his brother, he bought a load of British Petroleum stock, which promptly went up 20% in the space of a few weeks. Clive sold them at the top…which really fired his imagination. The prospect of being able to buy securities and sell them later at a higher price, and make money for doing little or no work was most attractive – and so the quest began, especially as he had been further stoked up by watching from the sidelines with a mixture of fascination and envy as fortunes were made in the roaring gold and silver bull market of the late 70’s.

Clive furthered his education in Technical Analysis or charting by ordering various good books from the US and by applying what he learned at work on an everyday basis. He also obtained the UK Society of Technical Analysts’ Diploma.

The years following 2005 saw the boom phase of the Gold and Silver bull market, until they peaked in late 2011. While there is ongoing debate about whether that was the final high, it is not believed to be because of the continuing global debasement of fiat currency. The bear market since 2011 is viewed as being very similar to the 2-year reaction in the mid-70’s, which was preceded by a powerful advance and was followed by a gigantic parabolic price ramp. Moreover, Precious Metals should come back into their own when the various asset bubbles elsewhere burst, which looks set to happen anytime soon.

Visit Clive at his website: CliveMaund.com

China is the world’s biggest gold producer with more than 355 tons annually. Australia is second.

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