The Precious Metals Charts Are Looking Bullish

I’m not necessarily holding my breath, but I’m seeing technical indicators which suggest that the sell-off in the precious metals sector that followed the big move higher from the end of September 2022 to mid-January may be running out of energy – perhaps setting up another bull move.

As an example, the Hulbert Gold Newsletter Sentiment Index (HGNSI) historically has been a fairly reliable contrarian indicator. After hitting the mid-60s, a level that historically has signalled a trading top in the precious metals sector, the HGNSI incurred one of its largest two-day declines – down 49.3 points – in the history of the data series in early February.

It then continued lower, hitting a -17.2% reading, which means that newsletters are net 17.2% short the sector. While the sentiment index does not provide information on the timing of a move higher or lower, the extreme positive and negative readings signal that a move higher or lower will occur. 

Similarly, the precious metals sector charts show an extremely “oversold” condition and are starting to reflect the possibility that a bottom from the recent sell-offs is either forming or is in place:

Gold ran up nearly 20% from September 26th 2022 to February 1st. The yellow dog has pulled back 7.2% to just above its 100 DMA (dark blue line) and 200 DMA (red line).

Similarly, silver soared 36.3% between the beginning of September 2022 through to January 13th. This is a large move in a short period of time by any standard.

It needed a healthy corrective pullback to wash out short-term oriented speculative traders:

Somewhat in line percentage-wise with the scale of the pullback in the gold price, silver has retreated 17.4% from its January peak.

The RSI momentum indicator (bottom panel) has been included to show the degree to which silver has become technically “oversold.”

Silver has also slashed below all of its key moving averages – most notably the 200 DMA (red line). In the past during cyclical bull moves, a correction down to or below the 200 DMA in the precious metals sector has preceded another bull move higher. 

Turning to the mining stocks, GDX soared 52.1% between September 26th and January 25th.

Though not a parabolic move, a move of that size needs to be technically “corrected.” GDX pulled back 19.2% from its top in January, and like silver, it has dropped below all of its key moving averages and down to an uptrend line that may or may not hold:

The RSI for GDX (not shown) is also showing an “oversold” condition but not as extreme as one for silver.

Circling back to the HGNSI contrarian indicator, the index began climbing back into positive territory on the last day of February and has moved further into positive territory since then. Historically, it is a positive signal when the HGNSI goes positive after several negative readings. 

Finally, the chart of i-80 Gold (IAUX, IAU.TO) could be another technical signal that the sector has bottomed and is headed higher.

Please note: this is an illustration of a working thesis using an individual stock and not an endorsement of IAUX as an investment.

The chart of IAUX is instructive:

The sell-off in IAUX in early March was technical, as it both slashed below its 200 DMA (red line, US$2.21 on March 8th) and decided to play “catch down” with the rest of the sector.

Per the chart, IAUX outperformed GDX (white line) since early October. I believe dropping below the 200 DMA triggered hedge fund (and some retail) selling and forced the performance of IAUX back in line with the sector. But also note the RSI (bottom panel) – When the previous two times IAUX’s RSI was as oversold as it is now, it preceded a rally in the stock and the sector. 

It’s anyone’s guess what happens next over the short term. There are several important economic reports plus the FOMC meeting this month that will dictate the direction of all of the markets over the short term.

But the fundamentals justify a much higher price for gold and silver, and the technical/sentiment indicators are signalling a potential bottoming process for the sector to be followed by a move higher. 

Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.

This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice. This publication does not intend to provide investment, tax or legal advice on either a general or specific basis.