Even though the action in the Precious Metals sector late last week suggests a period of near-term consolidation/reaction to ease the current overbought condition, the charts suggest that a massive and possibly unprecedented upleg is brewing, so we will start this review by looking at the most encouraging 6-year chart for GDX which is a good proxy for the entire PM sector.
The 6-year chart for GDX reveals that a very important and positive technical development occurred this month which was it breaking out from the giant Bowl or Cup pattern that formed in mid-2020.
This was the most positive action in the PM sector for many years, especially as PM stocks have got some serious catching up to do relative to gold itself. We should keep in mind also that GDX is still some way below its all-time highs that occurred in 2011 in the $58.50 area, however, having started to break out of the Bowl pattern it should now run to the resistance near these highs quite swiftly as a first objective before breaking above them into new high ground
whereupon we can expect to see dramatic acceleration.
Turning now to the 6-year chart for gold we see that it has been forging ahead in an orderly uptrend for over a year now and there is no sign of it ending – on the contrary, given the outlook for currencies, this uptrend is likely to become steeper over time, eventually becoming parabolic.
If we go back further and look at gold on a log chart from the start of the millennium, i.e. from the year 2000, we see that the uptrend from early last year resulted from the price breaking out of a truly massive Cup & Handle consolidation pattern that started to form following the 2011 – 2012 peak that marked the end of the great 1000’s bull market. Now, it is hardly likely that a breakout from a 12-year-long consolidation pattern will lead to a bull market lasting only 1 year – the least we can expect to see is a bull market lasting 2 to 3 years taking the price to far higher levels than it is at now.
Alright, so how much speculative froth is there in this market? – after all, you might expect some given how much gold has risen over the past year, right? - but the answer is that there is none, zero, nada – the retail investor is not involved in the PM sector at all yet – they are still trying to make money in the crypto market or in Tech stocks like Nvidia. How do we know there is no speculative interest? - simple - from the silver to gold ratio. Take a look at the following chart for the silver-to-gold ratio, also from the year 2000 and you will see that it is still at levels that we associate with major sector lows!! It is even below the reading it was ahead of the great 2000s PM sector bull market and at the 2008 market crash lows when the sector got taken down with everything else. The only time it got significantly lower than where it is now was during the orchestrated COVID-19 mass psychosis event of the Spring of 2020 when the masses thought that the world was coming to an end.
What does this mean? – it means that the upside for the sector from here is massive – this thing has barely gotten started yet.
Here’s another interesting chart, also from the year 2000, which shows that gold has barely started to outperform the stockmarket yet, despite rising about 50% over the past year. Gold is still only about a third of its value relative to the stock market that it attained in 2011 and so clearly still has huge upside potential on this metric. Worried about a stock market crash dragging down the sector as happened in 2008? – don’t be, the action of the past month or two shows that this is not going to happen this time round, and a big reason for this is that, apart from a few other tangibles, like other metals and minerals,
gold and silver will be the only game in town.
Lastly, while the medium and long-term outlook for the sector could scarcely be better, we should be aware that it is overbought after its latest runup with somewhat bearish candles appearing on the charts late last week, especially on Friday. We should therefore not be surprised by a period of consolidation or reaction over the near term. However, any such reaction, which is not expected to take GDX below about $43 - $44, will be viewed as a major buying opportunity.
