Friday , 28 October 2016

3 Signs That Gold, Silver & PM Stocks Have Finally Bottomed

Gold, silver and precious metals mining stocks are still nowhere near long-term or secular bottoms but I believe they could be approaching short-term tradable bottoms in the coming days or weeks based on the following 3 signals:

The edited excerpts above, and those below are from an article* by James Kostohryz ( originally published under the title Gold: 3 Key Signs Needed For An Actionable Short-Term Bottom and which can be read in its entirety HERE.

1. Weak hands capitulation.

I’m specifically looking for capitulation in two groups of gold holders.

  1. First, outside the futures market, GLD holders (both funds and retail) are the weakest hands in the U.S..
    • As of July 20, 2015, GLD gold holdings are at 694 tonnes, compared to 709 tonnes on December 31, 2014.
    • Based on past behavior, I consider that a short-term capitulation will be signaled when the holdings fall below 650 tonnes.
  2. Second, I’m looking for capitulation among Chinese retail buyers.
    • The first of several large speculative runs on gold in China occurred around 2010-2011, when gold surpassed $1,100 per ounce. Most buyers during that speculative run have just gone below water (some are still above water in yuan terms) and are about to panic.
    • Buyers during more recent speculative buying runs in 2012 and 2013 are now significantly underwater, and many that have endured modest losses until now are ready to throw in the towel with breaks in technical and psychological support levels.

Chinese retail investors, along with GLD investors/traders are the proverbial “weak hands” in their respective nations. It is necessary to see significant panic and capitulation among both of these cohorts to have any confidence about a short-term bottom in gold.

2. Semi-strong hands crack.

I consider “semi-strong hands” in the U.S. to be buyers of gold coins and gold bars who have purchased “physical” gold with the speculative intent of selling at a much higher price. This does not include investors who hold some gold as “insurance” against catastrophic outcomes.

There was a massive boom in speculation among the retail public in physical gold right around the time that gold was approaching and surpassing $1,000 per ounce between 2008 and 2010. Companies such as Goldline advertised massively to the public and the precious metals industries actively employed personalities, public speakers and bloggers such as Glenn Beck, Peter Schiff, Jim Rickards and others (that need not be named) to whip up public speculative demand for “physical” precious metals, based on outrageous predictions of gold prices above $10,000. This cohort of speculators has been subjected to a grinding and highly discouraging bear market that has no end in sight. I believe that a significant number of these “investors” are ready to throw in the towel, as they can no longer take the pain of their substantial losses.

In order to have any confidence in a short-term bottom, I need to see evidence of significant selling of gold coins and bars by this segment of the U.S. public. I’m not talking about massive liquidation, just reasonably significant selling pressure from retail gold holders.

There are several ways to track a “crack” in sentiment by semi-strong hands.

  • One is through commentaries of brokers that actually deal in this market (generally not reliable unless you have real industry contacts), and
  • the other is by tracking gold and silver coin premiums.
    • Currently, these premiums are quite high, indicating that the sentiment is too bullish.
    • These premiums should collapse to near zero to offer a signal of a short-term bottom in precious metals markets.

3. Widespread media calls for sub-$900 gold.

As gold approaches $1,000 per ounce, it is important that we see various financial media commentators predicting gold prices of $800, $700, $500, etc.

Only with predictions of a collapse of the gold market to prices well below the current spot price can one have any confidence about a short-term bottom in gold prices.

Gold prices are still extremely expensive, based on virtually all fundamental measures of fundamental and historical value. In this sense, the air is still being let out of the gold bubble that massively inflated gold prices beyond any reasonable valuation. Based on a variety of measures, fair value for gold is at around $800 (+/- $50), and a truly attractive long-term entry point for gold for long-term fundamental value investors would only occur at prices between $650 and $550.

Having said that, the gold market looks like it could be setting up for a short-term bottom and tradable rally in the next few weeks. I expect that the short-term bottom in gold will occur at a level of between $950 and $1,050. Under the right conditions, a subsequent tradable rally up to around $1,300 (+/- $50) is quite possible in a 6-18 month time frame after the bottom is in.