We are still in no man’s land right now with regard to the precious metals and miners. Powell disappointed the markets Thursday with little detail on the timing and tools to be used in relation to the Fed’s not-so-new policy of allowing inflation and employment to run hot over the coming years. In other words, he provided nothing we didn’t know already and was presumably priced into the markets. Yet, instead of being a ‘buy the rumor, sell the fact’ event, the Fed’s announcement overcame the initial plunge in markets, and stocks and precious metals rebounded higher. The key question is whether these latest rallies have just begun or are more short-term in nature until the Fed provides more concrete details on their plans.
Furthermore, the potential headwinds for markets remain a risk, most notably:
- The lack of any increase in monetary or fiscal policy; in fact, quite the opposite on the latter
- Simmering tensions between the U.S. and China made worse by the apparent intrusion on Chinese territory by the U.S.
- The risk of a renewed plunge in economic activity in the absence of new stimulus measures, aided by a wave of bankruptcies and rising unemployment
- A sharp reversal in equity indices
Focusing on the precious metals and miners, despite the recent bounce, they remain in no man’s land. That said, there are two primary scenarios that I’m following. While there is no exact science to the probabilities I assign to these two potential outcomes, I give the first one a 40% probability and the second 60% as of today.
Scenario 1: We have seen the low, and Gold is consolidating in a sideways move before heading higher again.
Given that the extreme overbought and bullish situation has been largely corrected and Gold is back to neutral, there is the strong possibility that we have seen the low and it is only a matter of time before we head higher.
Scenario 2: As outlined in the graph above and shared last week, we still have another leg down in the C wave to complete all of wave 4 before shooting up to new highs in wave 5.
While the overbought and bullish situation has been largely corrected, typically we see a move down to an oversold position before the bottom is in. This is designed to squeeze out as many late and therefore weak longs before the next rally occurs. I give this a higher probability at this time given the size and duration of the rally that preceded it, but we need to see at least a break of 1908 and preferably the low of 1874 to confirm this scenario. If it does play out, the minimum target on the downside is ~1800, then 1750, and worst-case 1670.
Silver may also have bottomed out already, but I am holding out for at least a move down to the support trendline at ~23 or a double bottom at 23.60 before we head up to new highs.
Should GDX continue in a further C wave to the downside, the support levels remain the same as last week: 37, 33, the 200-day moving average now at 32, and the triple low at ~31.
As with GDX, my targets on the downside for a further C wave in SILJ remain the same:
- Wave C = A at 13.35
- July 14 low at 12.30
- Wave C = 1.618*A at 12
- Triple low and 70-week moving average at ~10.25.
At the risk of repeating myself given the lack of any significant moves in the past week, if you don’t own any of the metals or miners, I recommend you buy “some” now given the rally I expect to follow this correction. This way you retain ammunition for a deeper pullback should that occur, and if not, still partake in a potentially spectacular rally to higher highs. At the end of the day, it is up to you and your personal risk tolerance, but long-term, I only see far higher prices to come in anticipation of a massive expansion of fiscal and monetary stimulus ahead.