The Precious Metals sector is now set up for a correction that could be quite severe, which is evident on the charts, but also made more likely by the fundamentals where we see a return to “risk on” as a result of ongoing massive money injection by the Fed coupled with this being a seasonally weak Summer period for the metals ahead of their seasonally strongest time which runs from late July through September. The return of “risk on” will be greatly encouraged by the stockmarket breaking out to new highs which will suck money out of the PM sector to be deployed in biotech, blockchain, the FAANGS and the better cannabis stocks, but it should return as the economy gets going again and all the newly created money starts to drive inflation sharply higher.
Starting with gold’s 6-month chart we see that it is weakening following a failed upside breakout from a Symmetrical Triangle, and is it now close to breaking the 1st line of support shown. Once that fails it is likely to head down to the next support level near to its 200-day moving average.
On gold’s 13-month chart we can see that while gold is firmly in a bullmarket there is plenty of room for it to react back significantly without breaking down from its uptrend channel.
The 6-month chart for GDX shows it completing what looks like a Head-and-Shoulders top at a quite a high level, and with this morning’s drop it could soon break down from the pattern leading to a potentially steep drop.
On the 13-month chart for GDX we can see that there is plenty of room for it to drop, and the minimum objective in the event of it breaking below nearby support is the support in the $26 zone, and given that once the psychology changes, declines in the sector tend to be self feeding, it could go quite a lot lower than that.
Silver just topped out at the resistance at a line of peaks and looks set to react back at least to the support shown on the 13-month chart, and could easily drop further if that fails.
One silver stock that actually has a strong chart overall that we bought a few weeks ago, Kooteney Silver, hit a trendline target as we can see on its 13-month chart and could get dragged down significantly with most other stocks in the sector. So it is thought better to take out now modest profits in this immediately and then wait for the chance to buy it back when the sector correction is thought to have run its course.
The conclusion is that the correct tactics with respect to the Precious Metals sector are to either step aside, or hedge with either leveraged inverse ETFs such as DUST, or better still Puts in say GLD and GDX, or a combination of the two. The corrective pahse will probably be over by early August.
End of update.
Posted at 11.00 am EDT on 5th June 20.