Wednesday, October 12, 2016

A Quick Look At The Current Correction In Precious Metals, Once Again

I guess many investors wonder where the current, deep correction in precious metals stock prices will end. Let me put an excerpt from the third issue of the Simple Digressions Newsletter (dispatched last Sunday):

"Chart 3

Source: Simple Digressions

The chart shows in / out flows of gold reported by GLD (the world biggest physically backed gold exchange-traded fund) on a weekly basis. Look carefully at the circle marked in brown. It shows that this week GLD prices (and gold itself) dropped 4.7%. However, and that is the main point, the fund reported an inflow of 352 thousand ounces of gold into its vaults.

Using other words – investors took advantage of lower prices of gold to load up fresh ounces into GLD vaults. In my opinion, it is a strong argument for gold bulls because, generally, when gold prices are falling GLD reports withdrawals of gold. This week’s inflows show that North American investors are doing things that prudent investors do (as, for example, the Chinese) – they are buying at lower prices.

Summarizing – I do not know how long the current correction in the precious metals market will last (my crystal ball lies in the cellar, covered in dust).  However, I know that this week Mr. Market offered many precious stocks at bargain prices, once again. I also know that prudent investors are still accumulating gold. It is by no means an indication of a bear market. Quite contrary"
Today I would like to add another point - a simple technique identifying the point / range where the precious metals market may have its strongest support. To do it, I will use the indicator offered by, called "Volume By Price" indicator.
According to the Stockcharts website, Volume By Price indicator is defined in the following way:
"Volume-by-Price is an indicator that shows the amount of volume for a particular price range, which is based on closing prices. The Volume-by-Price bars are horizontal and shown on the left side of the chart to correspond with these price ranges. Chartists can view these bars as a single color or with two colors to separate up volume and down volume. By combining volume and closing prices, this indicator can be used to identify high-volume price ranges to mark support or resistance."
Now, let me show the chart of GDX (which represents the broad precious metals stock market), applying the Volume By Price indicator: 
The chart shows that the highest volume, at which GDX share were trading between 2011 and today (during the last bear market in gold and at the beginning of the current bull stage), is attributable to the price range of $17.0 - $20.5. Using other words, it is the price range, which may be considered as a strong support or resistance level for GDX prices.
In the first quarter of 2016 GDX broke above this range. On that event a very strong support level for any correction in GDX prices was created.
According to the theory, now it should be very hard to bring GDX prices below this level. Putting it differently - the current correction should end slightly above or within the area marked in orange...

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