Monday, February 25, 2013

More On Capitulation In Gold & Silver - Rally Ahead

I wrote a post last week on timing and indicators:

As luck would have it the metals took another large dive lower the very next day... typical!

However, it should have been obvious from the post that the indicators provide a time frame during which to accumulate the metal, rather than being able to pinpoint the day of the exact bottom. A further $50 slide to lower levels of support was a possibility, as I wrote "the price of has bounced strongly off support at $1600 and if it does slip lower there is further support around $1550-1575". 

Gold fell to the lower level support I'd anticipated (during Wednesday trade). There is no guarantee a final low is in for this correction, a retest of support at those levels or even a further drop can't be ruled out completely, however there are strong signs that we saw capitulation last week, pointing to a probable bottom with higher prices ahead.

Below are some observation from Tiho on The Short Side of Long:

- We seem to be entering a liquidation period for PMs with volume rising rapidly
- Gold's public opinion is now at the 2nd lowest level in 10 year history
- Silver's public opinion below 35%, which is the same level as during 08 crash
- Gold's DSI was sitting at 6% bulls (out of 100%) on Thursday last week
- German investors hold 20% net shorts toward Gold, lowest since May '12
- Gold's COT shows hedge funds have cut bullish bets to lowest since late '08
- GLD ETF suffered the biggest weekly outflow since the September '11 bottom
- GLD Put vs Call volume has exploded to bearish levels not seen in years
- Rydex PM fund has suffer major 10% outflows in the recent months
- Central Fund of Canada ETF (CEF) is now trading at a discount to NAV
- Gold Miner breadth had climax sell off, 40% of Gold Bugs making new lows
- Gold Miners BPI reached single digit readings for only the 3rd time since 08
- Gold Miners Summation Index is almost a slow as October 08 and May 2012
- Gold Miners % of stocks above 50 & 200 MA was at extreme 0% last week
- Gold Miners vs Gold reached an oversold level last seen during late 08 crash
- Gold's daily RSI reading dropped below 20 last week, lowest in over a decade
- Gold Miners weekly RSI dropped below 30 last week, lowest since late 2008

And the below from Alex Cowie of Money Morning:

‘The most powerful signal in my eyes is the Gold Forward Offered rate (GOFO).

‘The GOFO is another measure of market liquidity, and is set to hit new multiyear lows. Over the last five years, the one-month GOFO has been a consistent warning sign of an imminent major move in gold. And importantly, these moves have been associated with outperformance in gold equities. And when GOFO turns back up, it’s the sound of the trigger being pulled to start the rally.’

Click Chart To Enlarge
And of course we can't ignore the fact that the downturn on Wednesday probably further exacerbated the sentiment & commercial positioning indicators in Gold. The COT report last Friday showed continuing improvement in positions with commercial short contracts in Gold the lowest since mid 2009 when the price of Gold was below US$950. We also saw commercials holding a record number of long Silver contracts in the 10 years data I have available (even though they are still net short overall). These positions were only current as of last Tuesday so again, likely to have improved by this Friday's report.

Another couple of points worth making is that GLD saw the "Puke Indicator" on February 20th (Dow Theory Investment):
Yesterday, February 20, 20.77 tonnes of gold were drained from GLD. In other words, GLD inventory decreased by 20.77 tones or 1.57%. As Victor the Cleaner has explained here such “pukes," contrary to conventional wisdom, are bullish, as they denote great avidity for physical gold, which forces GLD to disgorge its gold in order to put out fires elsewhere.
And  we also saw the Dow/Gold ratio top out at levels that appear to be previous highs from the last few years:

Click Chart To Enlarge
All things considered it's very likely we have put in a major bottom in the metals or if not we are very close to it and chances are those buying the fear exhibited will be well rewarded.

These indicators only suggest that a low might be near, they can't predict that the next rally out of these oversold levels will take us on to new highs (the bounce from 2012 lows didn't), however the environment for higher Gold prices continues, negative real interest rates and irresponsible fiscal/monetary policy. It's my opinion we will see record highs for Gold this year and a Silver price approaching $50 again if not over it. I'm prepared accordingly.

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  1. Thanks for the great post. It's essential that investors hold at least 10% of their net in gold and silver, especially in the current economy. There's no doubt that another rally is coming. We advise that investors purchase wisely and always track the live gold spot price on

  2. BB, no posts for almost a month! What you been up to, hope not looking for a new job like many more others out there?!
    It starting to look grim on the street, time to sell metals and go into other assets is closing upon us. My take 3-6 years at the current trend.

    I work with electronic components distributors a lot, like microchips. They are scared, hold no stock and wonder if they still going to have jobs. Last 6 months it's picked up, but trend is downwards for some years now.

    1. Fortunately not, in fact I've been so busy at work (due to project involvement, not increased business activity) that I have little energy left at the end of the day to blog. But there hasn't been much change to the PM market over the last month anyway.

      I also think time to sell metals could be as close as a couple of years away, but then I thought the same a couple of years ago, so will have to wait and see!

  3. So would now be a good time to buy PM?

    1. IMO yes, but those who want technical confirmation would probably wait for Gold to break above US$1620.

    2. That's looking less and less likely every day.

  4. It might be a good time for an update of the above $ price of gold & GOFO correlation chart given the Apr smackdown and current plunging GOFO backwardation. JPM's comex physical inventory drop another ominous sign of great pressures unseen.

  5. Would certainly be interesting to see what pressures are causing the negative GOFO.