Gold Mining Investors On The Brink Of Nirvana

Gold is on the brink of confirming that it is in the midst of the next leg of a bull market which began in December 2015. Without delving into various technical patterns the situation can be described quite simply in six bullet points:

  • Gold entered a bear market after reaching an all-time high at $1923.70 on September 6th, 2011.
  • The bear market ended on December 3rd, 2015 with gold bottoming at $1045.40.
  • The gold crash on April 15th, 2013 left an open gap up at $1560.50. Since that crash day which saw gold fall more than $200/ounce the yellow metal has been hammering out a broad based bottom with price largely contained within a range between $1150 on the downside and $1350 on the upside.
  • The rally from the mid-December low at $1238.50 has seen gold rally nearly 7% and string together one of its longest winning streaks in history (9 straight up days, and up 13 of the last 14 trading sessions)

Gold (Daily – 5 Month)

A Money Flow Index (MFI) of 100 is quite an unusual occurrence! However, the volume acceleration as price broke out over $1300 is undeniably bullish.

  • The situation is now fairly straightforward. Gold is sufficiently extended and overbought that a short term pullback/consolidation is in order, which will help to work off some of the overbought condition and cool off sentiment. However, the recent rally has the makings of an impulse move after a three month decline from the early September high. Impulse legs are characteristic of bull markets and often lead to periods of consolidation before the next impulse leg higher begins.
  • I can envision a scenario similar to the following chart playing out over the next few months with gold eventually breaking out over the $1377.50 July 2016 high some time in March/April of this year:

Gold (July 2012 – January 2018)

Support at $1300 is now critical, with an even more robust layer of support down near $1280. Resistance near $1350 should prove formidable before a breakout above $1377.50 should lead to a sharp rally up to the $1425-$1450 area as gold eventually trends higher on its way to filling the open gap from April 2013 at $1560.50 (red circle on left side of chart).

Gold is in a confirmed uptrend which has served to light a small flame into gold mining shares, however, it will be the breakout above $1377.50 which really lights the gold mining sector on fire in a big way (triple digit percentage gains across the entire sector); operating margins will expand by double/triple digit percentages which will in turn lead to strong earnings growth and valuation multiple expansion (investor nirvana).

 

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