Saturday, November 12, 2016

A Short Look At The Hated (Once Again) Gold Market

I realize many gold bugs are wondering what is going on. Well, the market is terrible now. Everything related to gold is going down. More, it is plunging.

Here is a chart showing the price action of gold:

Since its peak in July gold prices has lost 11.1%. Generally, it is not too much (11% correction in commodity markets? - Negligible...) but tell it to somebody who bought at the top...

Next, since its start in early 2016, the bull cycle in gold corrected around 50% (gold went up from around $1,070 to $1,380 and then lost half of the entire movement). It is quite a usual correction - nothing special in commodity markets. But tell it to somebody who bought at the very top....

Now, let me look at GDX:

The line marked in blue indicates the up sloping trend line and the line marked in red represents the downward trend. Keeping things simple, the upward trend should renew when GDX prices break the line marked in red. Now we are quite far from that point.

O.K. I am a gold bug but I have to have a plan "B". My plan B is that I will become very cautious if:

  • gold prices go below $1,200 (the green horizontal area on the first chart)
  • GLD investors start to decrease their gold holdings below current levels (see the chart below)
Now the well known chart of GLD:

On November 11 investors decreased their gold holdings by another 229 thousand ounces but the long-term chart still looks nice (gold prices going down but GLD holdings relatively unchanged). It does not look like a distribution. But tell it to somebody who bought gold at the top...

Summarizing - I do not think that from now on we will see only large drops in prices of gold and precious metals stocks. However, I would expect a lot of volatility in the coming days. But until GDX prices break the downward trendline to the upside we are still in the correction mode in precious metals stocks.

On such a market a careful stock selection is a key. The chart below shows how the stocks included in my Top Five Picks performed since inception (December 16, 2015):

Note that GDX (red horizontal line) returned only 48.9%. The overall return delivered by the portfolio is 132% at the moment (to compare, S&P 500 returned 4.4%).

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