The Price Of Gold Bottomed, And Silver Miners Might Offer An Epic Buy Opportunity

The gold price already bottomed, says InvestingHaven’s research team. The upside potential in gold’s price near term is 7 percent while gold’s price may rise 12 pct into 2019. Best case, though, if gold would get a bid with global markets continuing their sell-off we may see 25% upside. That’s when silver miners will do exceptionally well, similar to their epic rally in 2016.

Precious metals were quite weak in recent months, and, as always, there was a stream of bearish news in the same month that gold and silver bottomed. That was in August of this year, and InvestingHaven recommended readers to stay calm and focus on the leading indicators and gold’s chart which were suggesting a major bottom was being set.

This is a classic case in which it pays off to be contrarian. Although we believe the bottom in precious metals was set on August 14th, we had not seen any important sign of life in precious metals … until last week. Particularly on Thursday October 11th 2018 we saw a very powerful bullish pattern in the gold market which we tend to call a rounding bottom. Will this provide a buy opportunity especially in silver miners, even more powerful than described in our silver stocks forecast for 2019? We believe so for reasons outlined in this article.

Gold’s Leading Indicators

First and foremost we have to gain and understand gold’s future price. The point is that gold is the leading indicator during major precious metals market pivots. In other words it is gold that will lead silver and precious metals miners higher at the end of a bear market.

That’s why it is imperative to research where the price of gold is going, as it suggests where the whole precious metals market will go.

As per our leading indicators explained in our gold price forecast for 2019 the precious metals market has a solid outlook. Below is an overview of our 3 leading indicators being real rates, the Commitment of Traders report net positions, and the chart of the Euro.

First, real rates will likely be rising in 2019 but inflation also. That’s a good environment for gold. Real rates may be rising but it will likely not be significant unless something unexpected takes place which changes the current trends. The long term chart of 20 year Yields (see here, not embedded in this article) in the U.S. shows a rising trend after a giant rounding bottom was set since 2012. This suggests inflation has to rise stronger than rates in order to have an inflationary environment. Similarly, inflation, both government data but also ‘shadowstats’, show a similar trend higher. Inflation stats here. It is the trend that is interesting to us, not the absolute values.

Second, the Commitment of Traders report, short COT report, suggests that the downside in the gold price is limited. How can we know? Look at the positions of the largest market participants (middle pane) on the first chart. We are interested in high level trends combined with extreme readings in net positions of market participants. Both non-commercials (red bars) as well as commercials (blue bars) hold historically low net positions.

We have seen over time that similar positions resulted in a gold price rally, in some instances even an epic rally. 

The rule of thumb is that the more extreme the net positions the stronger the price reaction. We have annotated the Sharelynx chart below with green bars to indicate bullish extremes and orange bars bearish extremes. Note, in comparison, that the current readings are super bullish in comparison with previous instances.

Third, likely unexpected but our research indicates that the Euro’s chart structure is a very reliable leading indicator for the price of gold. In particular every time the Euro starts a pivotal change, like a breakout or a breakdown or test of support/resistance of its long term channel, it comes with a turning point in the gold market. This correlation is especially strong since 2013.

Gold Price Chart

From a chart perspective we take the classic top down approach: monthly chart first, then the weekly chart.

The monthly gold price chart is setting a major cup-and-handle. Make no mistake, chart-wise this is a very bullish setup. The weakness that started in May of this year marked the start of the handle. We believe that gold, in this formation, will go back up in the first months of 2019 to test the $1300 to $1375 area.

Note: as that will be the 3d attempt for gold to break out of its strong resistance there is a fair chance gold will succeed.

Readers should pay special attention to the 3 arrows on the monthly chart. The take-away here is simple yet powerful: higher lows within a falling trend. It should not come as a surprise that this is a bullish setup.

The weekly chart does not reveal any new insight. It confirms the weekly. As long as there is no divergence between timeframes we consider it a good thing. All comments are annotated on the chart below.

Buy Opportunity Especially In Silver Miners?

With recent global market weakness we believe that two things will happen. 

First, gold will confirm its August bottom, and will rise from here. That’s a forecast based on our leading indicators combined with the chart setup (rounding bottom).

Second, silver miners likely will outperform, especially if the S&P 500 continues to trade sideways for a while (not a 2008-alike market crash though).

When it comes to silver miners we stay focused on its ratio to the S&P 500, a ratio that hardly anyone else monitors. The ratio chart is the one below, and it sends a very clear message: a mega double bottom formation is bullish, and a small rise of SIL ETF combined with a small loss of the S&P 500 will create breakout on this chart in favor of silver miners. If and once this happens we believe we will see a replay of the epic 2016 silver stocks rally, an opportunity that not any investors wants to miss.

Courtesy of https://investinghaven.com

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