[There is] compelling evidence that the Precious Metals sector is either at, or very close to, a major bottom, and…the chances are high that the sector will rally strongly this year. [Here’s why.]
By Clive Maund (clivemaund.com) in an article* originally entitled IT COULD NOT LOOK BETTER FOR THE PM SECTOR GOING INTO 2015.
The old adages “buy low and sell high” and how the time to buy is when there is “blood running in the streets” have never… 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 the following three indicators:
- the Gold Miners Bullish Percent Index (extremely bearish sentiment),
- the XAU:Gold Ratio (extremely low relationship) and
- The GDXJ (extremely high volume)
1. Gold Miners Bullish Percent Index At Rock Bottom
In the chart below (which goes back 7 years) we 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.
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…
- when the XAU 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 the XAU 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 bull market, and at the depths of the 2008 market crash – Precious Metals stocks have already crashed and are friendless.
…Another powerful indication that the sector is bottoming is the volume pattern of junior mining stocks, expressed collectively in the form of GDXJ, the Market Vectors Junior Gold Miners ETF, whose 4-year chart below shows that:
- volume in GDXJ has ramped exponentially all this year to extreme levels.
IMO this activity must signify a bottom because the sellers must by definition be “dumb” because they are obviously selling at a massive loss to the Smart Money on the other side of the trade…i.e. from weak to strong hands, and since the new buyers are not going to sell until they have turned a profit…[as soon as] 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.
Deflation Concerns a “Red Herring”
…The worries about deflation dragging the sector further into the mud are a “red herring”. Gold does well during deflationary times…so if we do see deflation, it should not prove to be a problem for the sector.
Tax Loss Selling Establishing Base
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.
*Original Source: http://www.clivemaund.com/article.php?art_id=3371 PHPSESSID=7ce0df22d19747a3a9541a776fb72e5e (© 2004-2014 Clive P. Maund.)
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and www.FinancialArticleSummariesToday.com and the FREE Market Intelligence Report newsletter (sample here – register here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
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