Gold And Silver Might Bounce On Selling Exhaustion

Includes: GDX, GLD, SLV, SPY
by: George Kesarios

Is there such a concept as selling exhaustion? Is it possible that an asset might go up, simply because of a lack of sellers? The answer is yes. If there are no more sellers in any asset class, then just a few buyers will probably be enough to lift prices.

As Bloomberg tells us (via ETF Securities), sales of gold products accounted for 97 percent of a record $19 billion of net outflows from commodity ETPs in the second quarter. Commodity ETP assets fell to $127 billion from $186 billion at the end of March.

Nicholas Brooks, head of research and investment strategy at ETF Securities', in an interview said:

It may be that the peak of gold ETP selling is largely behind us. A lot of the bad news in gold has been priced in. The sentiment is extremely negative. When everyone is extremely negative, it's usually a sign that you are closer to the bottom.

I think I will agree with that statement.

As you can see from the chart below, while the S&P Trust (NYSEARCA:SPY) has increased about 28% since the beginning of 2012, the gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) ETFs have fallen 24% and 34% respectively. So while someone could make the case that markets might be a little overextended, the GLD and SLV ETFs are definitely oversold, any way you slice it and dice it.

(Click to enlarge)

Why a bounce and not a complete turnaround?

For starters, I still expect gold to reach $1000 in the future. While I might change my mind about the target price for gold in the future, I have not as of yet.

Another reason is I expect gold stocks to outperform gold for some time before we see a gold turnaround. So far that has not happened. When I see the Gold Miners ETF (NYSEARCA:GDX) outperforming gold and the GLD ETF, then I might change my stance on gold for good.

Yet another reason for a bounce is the fact that a good portion of the selling was done by overextend margined accounts and over-leveraged hedge funds. I am assuming most of them have been washed out for now, so there is not much forced selling at this point.

So for the time being I am putting out an alert for a gold and silver bounce, based on the possibility that most of the selling has been done, gold and silver are oversold and based on past experience, that when anything is oversold, a bounce - at the very least -- is probably in order. How high of a bounce might we get is not the subject for now. We will see how high gold and silver might go, if and when we see a bounce.

So keep an eye on the charts and be on the lookout for technical strength in the GLD and SLV ETFs, because a 10-20% bounce might be in order.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.