Precious Metals Approach Important Support After February Drubbing

posted in: Charts | 0

The precious metals rally from early November through the end of January was impressive and largely unexpected by most investors. After all, gold made a more than 20% move higher in the space of less than three months. As one would expect silver had an even larger rise, nearly doubling gold’s move on a percentage basis. What made the Q4 2022 move in precious metals all the more impressive is that this move took place at a time when most investors were bullish on the US dollar and a 2023 recession was all but a certainty according to most economists. 

Since peaking a few weeks ago we’ve seen what I would call a standard correction in precious metals and major mining stocks/ETFs. However, a ‘standard correction’ isn’t much consolation if you’re long – the declines have begun to bite a bit in recent days. The cheery spirits of conference week in Vancouver (AME, MIF, VRIC) have given way to frustration and a sharp rise in bearish sentiment among metals & mining investors that I follow and speak with on a regular basis. 

For my part, I can’t say I’m surprised to see gold move back to the $1850 area and silver drop a little more than 10% after being unable to hold above major resistance at $24. Any veteran gold/silver investor has been trained to brace for a smackdown after a few months of gains that felt almost too good to be true. This time didn’t turn out any different. Perhaps more surprising to me was how the market seemed to be so convinced a Fed pause was imminent just a few weeks ago.  

The good news is that I haven’t seen any $5,000 gold price calls from technical analysts in recent weeks, and sentiment is back to moderate bearishness based on the various sentiment surveys that I follow. While I don’t see gold vaulting back above $1900 in the next few days, I do believe we are getting a lot closer to the end of the correction that began on February 2nd. Furthermore, metals such as platinum may have reached an important turning point after a ~$200/oz decline since the beginning of the year:

Platinum (Daily)

I find it notable that platinum, like silver, bottomed on the final day of August 2022; while gold was hammering out a triple-bottom near $1620 platinum was putting in place a series of higher lows/highs throughout September/October/November 2022. Platinum also began to turn lower in early January, several weeks ahead of gold. I’m not saying platinum is a foolproof leading indicator for gold, but today’s bullish reversal off major long-term support near $900 is significant. 

The volume-by-price memory near $900 represents a major long term accumulation zone in platinum – sentiment on palladium and platinum are also close to washout over-bearish extremes (DSI of 18 as of the close on 2/15/2023). Putting it all together we will want keep an eye on the platinum chart over the next couple weeks. 

Turning to silver, it’s difficult to overstate the importance of support near $21:

Silver (Daily)

Silver is oversold enough in the near term that traders will likely be looking to place bids just above major support/resistance at $21. In addition, price holding above a relatively flat 200-day moving average tells me that significant declines like we have seen in recent weeks represent buying opportunities at important long-term support levels. 

After its February drubbing silver is down nearly 10% year-to-date, one of its worst starts to a year in history. Interestingly enough, silver had an even worse start to the year in 2010 and look at how things turned out that year:

Silver (October 2009 – December 2010)

By any measure 2010 was an exceptional year for silver, however, silver bulls will want to see signs of buying pressure returning in the next few weeks – a weekly close above $22.00 and confirmation of today’s spinning top candlestick would be encouraging. 

Finally, turning to gold and gold miners. It’s notable that the gold daily chart is not as ‘oversold’ as the silver or platinum charts. In addition, the 50-day moving average is still sloping higher. My support levels below are $1825 and $1780. However, the $1850 level still has a very good shot at holding on a weekly closing basis. 

Gold (Daily)

It’s not a secret that gold has recently traded with a very strong correlation to Treasury yields. In fact, the negative correlation between the 10-year UST yield and the USD price of gold has been clocking in at about 90%. The good news is that the 3.90% yield level on the 10-year represents important resistance. While many market commentators have begun calling for a breakout in long-term UST yields in recent days, I would not be surprised to see the long end run out of steam as economic data deteriorates further (such as this morning’s Philly Fed reading of -24.3 vs. expectations of -7.8) and the US consumer becomes increasingly tapped out. 

Gold miners as represented by the HUI Gold Bugs Index have declined seven consecutive trading sessions, and 10 of the last 11!

HUI (Daily)

Such deeply oversold conditions coinciding with a backtest of the 200-day SMA and the 50% retracement of the entire September-January rally are the sort of setups that traders like myself live for. I am long the GDXJ for a trade and tomorrow’s weekly close takes on added importance considering the velocity of the preceding decline and the nearby technical confluence. 

If there is one thing I have learned from trading precious metals and mining stocks over the last twenty years it is that it’s almost always a mistake to chase a big rally. But perhaps even more important is that the most money is made by buying at low prices when others are fearful and the most unwilling to take risk.

 When the time comes to buy, you won’t want to. 



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