February 07, 2020
It’s been over five months now since the spectacular yearlong rallies in Gold, Silver, and the miners ended. Gold is the only one to have set a higher high since then. Otherwise, we have been more or less going sideways, consolidating prior gains. With that said, it does feel like we are close to a resolution one way or the other shortly.
Sentiment and especially positioning remain at extremes that typically signal a sharp drop, particularly in Gold. But the long-awaited breakout to the upside in Gold last summer went a long way towards confirming that we’re in a new bull market that started back in December 2015. If that is indeed the case, then it is the trend that matters most now, and that trend is clearly up. Aside from any short-term pullbacks, the bias is clearly to the upside. However, I am not one to rely on bias. Quite the opposite. With sentiment and positioning of little use to us at this time, we need to identify and focus on the levels that will indicate whether we have further downside ahead or the next rally is about to get under way.
I have been saying this for months and it still holds true: as long as we remain above 1340, just below the peak last February, I am only looking up. Ahead of that, you have the November low of 1446, which just happens to be around the 200-day moving average also.
Then there is 1522. Since the peak on January 8 th at 1613, I have been expecting a corrective ABC wave. Wave A was 1613-1537. Wave B 1537-1598. If we get wave C = wave A, a drop of $76, that would target 1522 as the bottom of this correction and the starting point for the next rally. This also happens to be trendline support since the May 2019 low (yellow line below) and the 50-day moving average.
1510 and 1485 are 61.8% and 76.4% Fibonacci levels of the entire move up from 1446 to 1613. If wave C = 1.618 * wave A above, the target on the downside is 1475. Any one of these could provide the low for Gold before it begins its next rally, but the first sign of trouble would be a move significantly below 1522.
In summary, I am looking for one more low < 1536, preferably 1522, before the next rally begins, but it is by no means necessary.
Support levels in Silver are similar, with 16.20, the peak in February 2019, a huge red line in the sand. Ahead of that is the December low of 16.57.
My primary target on the downside is ~17.18, where wave C = A in this corrective move lower. Below there is the 200-day moving average and 16.44, where C = 1.618*A.
On the contrary, a break of the recent high of 8.13 would likely mean the bottom is in and the rally to north of 20 has begun.
The two key levels to watch on the downside in GDX are ~27.50, where wave a = c (in green above), and ~25, where big wave A = C (in yellow). A break of 29.25 to the upside would suggest the low is in.
I am still looking for 10 to 10.15 on the downside in SILJ, where wave C = A again. But given the spectacular rally that I’m expecting to follow, I have already added some in the 10 area. A move back above 11.65 should confirm the bottom is in place.
Given the importance of real yields to precious metals and miners, below are the levels I am following in TLT and TIP.
The key levels of support in TLT that I’m watching are ~132 and ~140-141. If these hold and TLT heads higher, that would be supportive of precious metals and miners prices.
TIP is the inverse of real yields, so whenit rises, real yields fall. This also means that when TIP rises, precious metals and miners tend to also, and vice-versa for a drop in TIP. The first keylevel of support I am watching here is ~117.20.
In finishing, I wanted to share the two primary scenarios I am following from a fundamental perspective. The first being that stocks continue to head higher on even more money-printing from the Fed. This could mean higher bond yields in the short-term as money flows out of bonds into stocks. Yet, I believe the Fed will cap the 10-Year Treasury yield somewhere between 2-2.50%. At the same time, higher and higher stock prices may finally have an impact on inflation expectations and thereby reduce real yields, which would be support of precious metals and miners going forward. I discussed this in detail in my previous article.
However, there is also the possibility that we get a 2008-like crash this year. There are so many potential catalysts, but the most obvious is a marked global slowdown, led by China, due to the spread of the coronavirus. Whatever the driving factor is, the risk is that stocks fall hard and we see a spike in real yields similar to that in 2008, which could hit metals and miners hard but only in the very short-term. The Fed and global central banks are likely to run the printing presses 24-7 were that to occur, sending Gold and Silver and especially the miners through the stratosphere.
In the meantime, keep an eye on those levels as signposts for what’s coming next. Unless key support levels are broken, I am only looking higher.