All sorts of opinions are flooding in about why the precious metal is declining, what’s coming next, why investors should buy or why they should sell. Panic seems like an appropriate description of the current emotional state for many gold bulls. [The fact of the matter, however, is that] gold is simply declining because it became overbought, and there are corrections along the way in a bull market. Nothing out of the ordinary is occurring in the gold sector at the moment. Valuations became stretched, and the computer algorithms are hitting the key technical levels like clockwork during this short-term downtrend.
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I warned this past August that the gold sector was losing momentum, and the next 2-3 months or so would be more of a corrective process as we worked off very overbought conditions (especially in the gold and silver miners). In my last update on September 26, I mentioned that the key support for the SPDR Gold Trust ETF (NYSEARCA:GLD) was $124.75, and “as long as GLD remains above that mark, this is a very bullish looking short-term chart… and be mindful of a possible bear trap should GLD temporarily decline below $124.75 over the next week or two.”
You can see how important that $124.75 level was for GLD, as the very second it declined below that mark, an avalanche of selling occurred. The most obvious next line of defense is the 200-day moving average. I do believe that GLD will finally find its footing in this region, but it could have a few more tests of its resolve this coming week.
…If GLD climbs back above the 200-day, then that is bullish but, the longer it stays below and the further it declines, the more bearish the situation …[will become]. I don’t envision a bearish scenario unfolding, but there is no need to risk being wrong and jumping in now when GLD is such a small step away from regaining the upper hand for the bulls.
…In my last article I said that, “220 is the line in the sand, if that is broken then expect another 10% drop down to the 200 day moving average” and that’s where the HUI sits today…
So “Where is the bottom?” Most likely it’s at current levels, but again, there is no need to be a hero. This certainly feels like capitulation, as gold and silver stocks have experienced 30-40% declines. If a snap back rally occurs, then the gains over the next several months will be impressive but, with the HUI so close to breaking back above the 200-day, it’s more beneficial to be a little cautious here until it moves a few points higher.
Let’s explore the other scenario, which is further losses in the HUI and possibly a retest of 150-160 or even the January 2016 lows of 100. How likely are these events?
Well, let me just put it this way. I have been heavily involved in the stock market for almost 20 years and, during that time, I have never seen a sector go through a vicious bear market, experience a major rebound with stocks in that sector moving up 2-10x, and then totally collapse back down on itself. I don’t even think those with 50 years of stock market experience have seen that happen. Maybe gold would be the first to accomplish this “feat,” but I’m not going to bet on it…
[As I see it,] this time around, the HUI could very easily be at 285 again by early next year, and this decline will be a distant memory.
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