Last I wrote, I expected precious metals could begin a decent rebound. The gold stocks were very oversold, gold had cleared $1800/oz, and the Fed would be easier.
Unfortunately, gold failed at $1835 and last week failed at $1800/oz. Now the gold stocks are back at their lows.
This isn’t very pleasant, but there is a silver lining.
A bullish setup is potentially emerging, and this is the type that can precede a significant rebound.
I’ve written about the importance of a stock market correction as a needed catalyst for precious metals.
The S&P 500 closed the week below its 50-day moving average for the second time in the last six months, and the downside risk is rising.
The following is calculated from sentimentrader.com’s bear market probability and macro index model. The dots point to when the spread between the two indicators surpassed 20%.
Source: Sentimentrader.com
Here is another worrisome chart. This is a breadth indicator constructed from when less than 40% of the S&P 500 stocks were outperforming the index.
I could share a few more charts like this, but I think you get the point. There is a growing risk of a significant correction in the stock market, and if that were to happen, it would likely be a very bullish catalyst for precious metals.
That does not mean precious metals are a strong buy right now.
After failing at resistance multiple times over the past few months, gold closed the week at $1751, its lowest weekly close since April. The path of least resistance is lower, and a test of $1675 is all but assured.
Meanwhile, the miners have room to fall before reaching strong support levels.
The Hui Gold Bugs Index (gold producers only) had downside to 215 and 206, which was the 62% retracement from the 2016 low to the 2020 top. VanEck Junior Gold Miners ETF (NYSE:GDXJ) had a target of $35, which also marked the same 62% retracement.
HUI and GDXJ (weekly bars)
Classic breadth indicators, and my proprietary breadth indicators, show oversold readings, but they may need to hit full-blown extremes before it’s reasonable to buy.
The bad news is that the short-term outlook is bearish.
The good news is that if we get a stock market correction coupled with an extremely oversold condition in precious metals, it would lead to a significant move higher in precious metals.
Before the end of the year, we could reach a time to buy the precious metals sector aggressively.
I’m focused on finding quality juniors with 7 to 10 bagger potential over the next two to three years. The recent decline and a continued decline in the sector will price out much of the risk in these stocks.