Wild Oscillations But No Real Progress For Precious Metals Stocks

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Includes: AGQ, BLNG, CEF, DBP, DBS, DGL, DGLD, DGP, DGZ, DSLV, DULL, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GLTR, GTU, GYEN, IAU, JJP, OUNZ, PALL, PGM, PHYS, PPLT, PSLV, PTM, QGLDX, SGOL, SHNY, SIVR, SLV, SLVO, SPPP, UBG, UGL, UGLD, USLV, USV, ZSL
by: Bob Kirtley

Summary

Politics and Central Bankers are huge influences on the precious metals sector of this market and should not be ignored.

Until we see inflation kick in with some gusto there will be a lot of talk surrounding rate hikes, but a not lot of action.

Gold, silver and the associated mining companies are ready for blast off, but may be subdued in the near term as central bankers tip toe over a fragile economy.

Preamble:

It has been a year of wild oscillations but very little progress for the Precious Metals stocks as depicted by the chart of the Gold Bugs Index, the HUI. A quick glance reveals that the stocks started the year very well indeed and rallied until March where they stuttered and then returned to test the support level of '180'. The summer rally saw the stocks rocket from 180 to 220 before dropping back to 189 as we write. These rallies are in the order of a 20% move to higher ground, alas, they are followed by a 20% decline.

The PM stocks hit an all-time high in 2011 when the HUI hit 630 and then a vicious bear market took them all the way down to 100 at the start of 2016, registering a fall of 84%, a stomach wrenching experience for all those involved.

Where Next:

As we see it this tiny sector of the market has broken out of its downward trend and is base building in preparation for the next major rally. Now, we are aware that correlations are not scientific proofs, but, gold and silvers fortunes are tied in a large extent to two of the major currencies; the US dollar and the euro. The euro makes up 57% of the US Dollar Index with the yen, pound and the loonie at much smaller values so we will ignore them for now.

The euro rallied for most of the year until September when it faulted and turned south dropping from 121 to 116 or 4%. The euro is being hampered by the uncertainty caused by both Brexit as the UK tries to untangle itself from the European Union and by Spain's Catalan region pushing for independence from Spain. If both succeed, then the other member states will need to step up and contribute more to make up the shortfall in funding. The US dollar had been in freefall for most of the year until September when it hit 91 and has since rallied to 95 for a gain of 4.9%. This is important to us as gold tends to be inversely correlated with the dollar and as we can glean from gold's chart it peaked at $1360/oz in September and has been falling since to $1275/oz, a fall of 5.5%. So, it is a case of the euro down, the dollar up and gold down.

Coming up we have a new head of the Federal Reserve; Jerome Powell who succeeds Janet Yellen as the new Fed chair starting in February. This appointment could be more of the same as he has been a board appointee for some time, however, it hardly seems worth making the change unless he is about to deliver something different. The US president has said in the past that he wanted a weaker dollar and as inflation isn't exactly going gang busters then rate hikes may be few and far between. The mere threat of a rate hike tends to spook gold and send it lower, if that threat wanes then gold should experience a resurgence.

Mario Draghi, the President of the European Central Bank (ECB) gave a speech in Frankfurt yesterday where he asked the banks to cut costs instead of blaming the European Central Bank's monetary policy for their poor performance. "There is little evidence that negative rates are undermining banking profitability." He said. The Euro closed a tad higher on the day but is still trending lower. If the ECB can remain accommodative without too much drama, then the euro may resume its trend higher thus sending the dollar lower in terms of gold and silver.

The HUI Chart:

The MACD, RSI and the STO are in the oversold zone now which suggests that the stocks could rebound in the near term. Also note there is a positive formation on the MACD about to take place. On the downside the support at 180 needs to hold, if not the next stop is 160 and if that fails we could see a re-test of the 100 level. The 50dma has turned south and should it cross the 200dma in a downward motion it would form the cross of death which is a negative for the stocks.

Conclusion:

Politics and Central Bankers are huge influences on the precious metals sector of this market and should not be ignored.

Until we see inflation kick in with some gusto there will be a lot of talk surrounding rate hikes, but a not lot of action.

Gold, silver and the associated mining companies are ready for blast off, but may be subdued in the near term as every central banker tip toes through a fragile global economy.

There will be lot of volatility as 2017 comes to an end but we expect to see a strong move to the upside in early 2018.

Finally, only deploy small amounts of capital into each stock no matter how good you think it is as a week can also be a long time in the life of a producer.

Disagree; great then tell us why as the more diverse comments we get the more balance we will have in this debate and hopefully the better informed and more profitable we will all become.

Go gently.

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Disclosure: I/we 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.