A Precious Metals Correction Must Come Now? Mustn’t It?

Gold and silver have both moved sharply higher this year. So many people are thinking “we must see a decent sized precious metals correction now after such a big move higher”.

Surely this makes sense right? Well, we have a few thoughts on why it just might not be as clear cut as this…

Gold and silver have both had strong moves higher so far in 2016. They are in fact the best performing assets this year. Even with the New Zealand dollar also strengthening versus the US Dollar, local precious metals prices are still up strongly as you can see in the charts below.

NZD Gold is up around $300 year to date (or about 18%).

NZD Gold 6 Month Chart - performance so far in 2016

While NZD silver has played catch up over the past month and is now up around 25% year to date.

NZD Silver 6 Month Chart - performance so far in 2016

After performing so badly for the last few years precious metals seem to be making up for it now.

But after such strong moves higher surely both metals are well overdue for a correction now?

We spotted the below video on Gold Seek this morning that sums up nicely all the very solid reasons why gold will now pull back and you’ll be able to buy at lower prices.


Traders Shouldn’t Chase the Market

“Traders you don’t have to chase, you will get a better opportunity. Traders already long should trail a stop. Old Turkey’s just ignore the market for the next 4-5 years.”

He covers how we have:

  • A large commercial short position in gold
  • The largest net short commercial position in silver
  • Momentum indicators highest in several years
  • Sentiment reading on precious metals and mining ETFS such as GLD, SLV,  GDX and GDXJ are 96% bulls.
  • Gold Miners Bullish percent index is above 80%

These are all very valid and sensible reasons as to why a correction in gold and silver should be expected.

However we can think of some reasons as to why this might not happen – well at least not just yet.


Why a Correction May Not Happen Yet – Follow the Money

While some technical indicators of sentiment in the precious metals sector may be indicating high levels of bullishness, when it comes to what people are actually doing with their money it seems to indicate quite the opposite.

A recent Bloomberg article shows that while gold stock mining indexes have been on fire with huge rallies, they are actually seeing draw downs. This means that people are selling these ETF’s into what it seems they believe is just a short term rally. It they were topping out then we should more likely see just the opposite happening, with retail investors rushing in to buy instead. Here’s the article:

Gold Miner ETFs Are Having the Rally of a Lifetime and Burned Investors Are Missing It

“Investors in exchange-traded funds tracking gold mining companies just can’t seem to get it right.

After years of trying–and failing–to call a bottom for the miners, investors are scared to buy into what is turning into the rally of a lifetime for ETFs tracking these once left-for-dead stocks.

Despite returns of more than 65 percent in a year when the S&P 500 is up 4 percent, gold miner ETFs have seen half a billion in outflows. That is practically unheard of as inflows and performance are usually highly correlated when it comes to ETFs. Gold miner ETFs, it seems, are the rare exception.

This atypical trend is best exemplified in the above Market Vectors Gold Miner ETF (GDX), which has $6.6 billion in assets and is up 66 percent so far this year but has seen $514 million in outflows. This oddity is no doubt connected to the billions that were poured into GDX over the past several years as investors bloodied their hands trying to catch a falling knife. GDX had lost 75 percent in the three years leading up to 2016.

GDX’s mini-me–the Market Vectors Junior Gold Miners ETF–is also in the top 10.

Throw in a few of the smaller gold miner ETFs as well, add it all up, and such funds have effectively burned through about $8 billion in investor cash. That’s more than any other industry, sector, or category.

This explains why such an intense rally can coincide with outflows, as many burned investors are getting out and trimming losses before they get burned again.

One gold miner ETF is seeing some significant inflows, however. The only problem? It’s the Direxion Daily Gold Miners Bear 3X Shares (DUST), which is down 88 percent.

Meanwhile, the Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG) has put in a jaw-dropping return of 294 percent (along with outrageous volatility that is 10 times that of the S&P 500).

JNUG is returning four times the returns of its underlying index due to the compounding effect of resetting leverage daily into a upward-moving market. No ETF has ever returned more than 300 percent in a year. Yet JNUG has still seen $83 million in outflows.

It remains to be seen whether some of these burned bottom-callers will be drawn back in by this rally, but for now, they aren’t touching it with a 10-foot pole, or an ETF.”


So investors don’t seem to believe this is a return to a precious metals bull market. As the article states they are actually betting on this with money piling in to the inverse gold mining ETFs. These are the ETF’s that are designed to do the opposite of the shares. So if gold shares fall they rise.

In the case of DUST, the Direxion Daily Gold Miners Bear 3X ETF, it is seeing high volume buying continue even after it has fallen 88% year to date! So this means the average investor continues to expect DUST to bounce back. Or rather put another way expects miners to fall.

We discussed the rising volume of DUST back in mid February.

The rising volume is clear in the chart below. It has even increased over the past month. So we’d say this is actually still a bullish sign for gold and gold miners. It indicates that most people still think this is just a short term rally in an ongoing bear market. So they are buying a fund that they expect to profit from a fall in gold shares. Only trouble for them is they have been wrong since February.




Still Not Significant Buying of Physical Metals

We’re also not seeing large scale buying of physical gold and silver from our customers. Sure there has been a pick up but it is by no means a flood of transactions. This also seems to indicate there are plenty of people sitting on the sidelines expecting to get in at lower prices than current ones.

We’re not saying there won’t be a correction though. Nothing can go straight up!

But we just wonder if when that correction comes, it might be from much higher levels than where the prices of gold and silver are today? So the lows of that correction might actually be higher than current prices.


Will Gold and Silver Just Continue Consolidating Before Moving Higher?

NZD Silver 6 Month Chart - performance so far in 2016NZD Gold 6 Month Chart - performance so far in 2016

Let’s cast our eye back over the silver chart from earlier. We can see that silver consolidated in a range between $21.50 and $24.00 from February to mid April, where it broke out and move sharply higher.

While we can see in the gold chart above, gold has also been consolidating since February after moving sharply higher in January.

So perhaps we will see silver consolidate at these levels. And perhaps gold is getting ready to move higher again before long?

This rise in the precious metals complex year to date is the biggest rally in years. It is perhaps reminiscent of the early 2000’s when gold rose steadily without too many people noticing.


So What to Do Now?

Well, in our daily price alerts (you can sign up to those here if you want to keep a close eye on prices) we’ve had this feeling for a while the metals would just consolidate before moving higher.

While a decent sized retracement in price has been expected by many after the strong rise so far in 2016, it just hasn’t happened thus far.

Our angle on it has been that the biggest risk for those that do not yet have a position is that we don’t actually see a significant correction at all.

As noted already there is a danger for anyone sitting on the sidelines that when a correction comes, it might be from much higher prices than where we are. So the lows of that correction might actually be higher than current highs.

So consider taking at least an initial position now. That way you won’t be left on the sidelines if a larger correction doesn’t eventuate, but you could keep some cash in hand to try and average down if there is a decent sized pull back.

Get in contact via 0800 888 465 if you’d like a quote or have any questions whatsoever about the buying process. Or you can order online here.

To better understand what technical analysis is, and help with timing when to buy gold or silver and check out this article:  Gold and Silver Technical Analysis: The Ultimate Beginners Guide

To learn more about when to buy gold and silver see this article: When to Buy Gold or Silver: The Ultimate Guide

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