Gold And Silver Miners Look Weak In The Face Of Gold Making All Time Highs

Despite gold making yet another all time high again today the gold mining stocks have looked weak and are lagging spot price by a wide margin. Part of this is to be explained by the current risk-off nature of the market since investing in a company that owns gold is riskier than just buying the metal. At this point traders aren’t looking for profits as much as they are looking for protection so the lag between the two makes sense. However in the past a sink in the GDX has led previous corrections in gold and given that gold seems to be making a new all time high every time I glance at the chart, it also makes sense to conclude that there has been a sizeable influx of longs in a short period of time which could tell us that gold is getting extended.

I do see short setups in the sector but I won’t be taking any yet as we are a few hours away from the Fed minutes and a day away from a speech that will be made by the Fed chair. As such, shorting into the Fed announcement would be suicide since you can almost guarantee a rally in gold and silver regardless of what is said (lets face it, Bernanke is the ultimate stimulus for PM’s). However, gold is extended farther than it has ever been save the 1970’s going into the Fed announcement and given that everyone seems to be bullish on the metal, the FOMC may be the perfect contrarian indicator in this case.

Gold is up 15% in the last month which tells us that it is extended but that alone is not enough to initiate a short.

The weakness in the GDX tells us that traders are bullish only on the metal and despite all that has happened, they are not completely sold on gold in the long term and translate gold as an investment as a safe haven and not something that will garner profits. There is a bear flag on the daily chart of the GDX and its target is the pivot low of $53.37 that was set in May. Again, until the FOMC statement is made, I wouldn’t advise any type of trade given that the pattern can be easily negated during Bernanke’s speech, but what you need to know is that if it stays below the 200 MA on a closing basis, the pattern is intact.

Some may remember by article on silver’s long term trends from a few weeks ago where I used the charts of several silver miners that were showing head and shoulders tops to bring to light the possibility of a large correction. The head and shoulders pattern is still intact on SIL and price activity is hovering right on the neckline. Confirmation above the 50 and 200 MA would likely negate the pattern but confirmation below the neckline would initiate a target of at least $16.

Moving on to the weekly chart of SLV, the recent consolidation is still an inside bar bear flag. The lower trendline is where I expect silver to ultimately reach at some point in the future and I believe that a tag of that trendline could be the best buying opportunity we’ll have in silver since the 2010 Jackson Hole meeting. Just be sure to keep in mind that the circumstances in which the level is reached will play a huge factor as to whether or not it becomes the ultimate bottom.

The sum up what I’m seeing on the charts above, SIL served as a leading indicator for the drop in silver as it came 7% off of the highs in the weeks leading up to silver’s apex. Currently we’re seeing similar action from the GDX in relation to gold as the GDX is 9% off of its own peak and gold is continuing to make all time highs as more bulls enter the market. Therefore I’m seeing a few red flags pop up and would advise remaining careful until equities find their footing and gold stablizes.

Regarding the precious metals market as a whole, everything has played out as expected. Gold is making all time highs due to the fear of default and financial problems in Europe, poor economic data in the US, and the downgrade of our debt, which is exactly why we all have been bullish on the metals to begin with. The important thing to remember is that although things are playing out as expected and the fundamentals have never been better, the same thing could have been said for silver in April before the collapse, which if you had bought at the top, you would still be underwater and will still have to wait many months for those highs to be reclaimed.

Caution is the best strategy here. The stock market is getting pummeled and there is no reason to be a gunslinger. A pullback or dip is not a 2% drop in gold in one day after a 15% rally. A pullback is a 5-8% correction over a period of time (I.E.) weeks or months. After silver collapsed some of you may remember me saying ‘I don’t care how far silver comes down, what I care about is how long it consolidates for’. What this means is that time plays much more of a role in a market correction than price does so do not feel pressured to buy more shares of your favorite gold stock in fear of being left behind. That kind of mentality is based off of emotional trading and leaves logic behind.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

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