Seeking Alpha

Gold And Miners - Expectations For Future Upside

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Includes: DGL, DGLD, DGP, DGZ, DZZ, GDX, GDXJ, GLD, GLDI, GLL, IAU, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Brian Fletcher
Summary

Gold and precious metals are in a complex pattern, and while there is upside ahead, there is a strong case to be made for that upside occurring from lower levels.

The jury is still out as to which Elliott Wave count is most probable.

Don't get overzealous in accumulating miner stocks at current price levels. Be patient and wait for the right setup to occur.

Taking an overly enthusiastic stance will, over time, cause havoc to your brokerage account. Be rational, position smart, and take a long-term view to the miners sector.

There are several alternative ways of looking at gold and the precious metals mining sector right now. Some analysts choose to focus solely on the most optimistic upside patterns because of their FOMO (Fear of Missing Out), and while the overall pattern off the late 2015 low might allow for extreme and immediate upside, this somewhat sensationalists approach over the last 8 years has proven to be hazardous to the brokerage accounts to those who have followed this type of approach. In this article, I will discuss the various potentials that might allow investors to approach this sector with a reasonable long-term approach that affords them the potential to participate without getting caught up in a fear of missing out approach that causes unacceptable short-term pain to their portfolios.

At this very moment, metals and miners are “in the middle” of two primary counts and have not shown their hand yet as to which is going to ultimately prevail. They are – 1. Completing an intermediate time frame wave structure that supports extreme long-term upside where the late 2015 low will not be revisited; and 2. Completing an intermediate time frame structure that supports another low below the one established in late 2015. It is important to recognize that, even in the long-term hyper bullish pattern, there will most likely come a time where investors can buy mining stocks below current price levels. There are a few other anecdotes that cause some pause in convincing us that metals are simply going straight to the moon. Firstly, waves 2s are normally fairly swift in nature as compared to B-waves or 4th waves. The move off the 2016 high was anything but swift and, in fact, was slow, long in time, and choppy, and from a pure Elliott Wave observation perspective, more resembles a B wave than a wave 2. In addition, gold is the only metal that has taken out its 2016 high thus far. Silver, GDX, and the HUI GOLD BUGS index have still not taken out their highs established in Q3 2016. This comment by no means suggests that they can’t, or even won’t, but in a true 3rd wave, one would normally expect that silver and miners would lead the charge vs. taking a back seat as they have done heretofore.

In order to better understand the potentials, allow me to look at varying patterns in play on several different instruments in order to better understand what is possible. Let us first start with the VERY Bullish posture analysis, as reflected on the HUI GOLD BUGS Index chart below.

The HUI GOLD BUGS Index shows a reasonably solid 5 wave structure up off the late 2015 low, followed by WXY pattern or a wave 2. If indeed this is a wave 2, then one would normally expect that the next impulsive structure, which is wave 1 of 3 would extend up to the .618 or .764 extension level, then pull back in a wave 2 against this move. Thus far, HUI has not reached either of these fib levels. Assuming it does, then we would expect a retracement against the wave 2, as shown on this chart as the wave 2. Firstly, it is important to recognize that this count is completely valid. However, it is impossible to know at this moment if it’s probable or not. Assuming it does fulfill a move up to the .618 or .764 extension levels, then the long-term long entry for miners would be on the retracement of this move, which would most likely retrace to a level below current levels. From a purely long-term perspective, even in the hyper bullish count, investors who are seeking to position for a long-term buy and hold strategy should not feel pressed into buying those positions today, per se. The exception to this thesis is that the wave 2 pullback is very shallow, resulting in missing the move up entirely. However, this would not be the norm, and we would normally expect a wave 2 pullback to a .50 - .618 fib level, which would project below current levels.

HUI GOLD BUGS Index

HUI Goldbugs Index

Now, allow me to review the Gold Weekly Chart below.

The move off the 2016 low in gold can be viewed as impulsive or as an abc, either potential applies to this chart pattern. If viewed as impulsive, then one would normally expect a swift wave 2, which it did provide. However, one would also normally expect a after the completion of a i ii 1 2 pattern a swift move to the 1.236 extension, and not that gold came short and failed to achieve this fib level. What it did hit, and respond to was the c = 1.382 x a, as shown on this chart by the brown fib levels. In an impulse, one would then expect it to hold the 1.0 extension, which it has also done thus far. So, at this moment, gold has held the potential for an upside impulsive move that simply takes off to the upside. However, it can also be viewed as a WXY pattern. So, either potential is still alive and well. Our own view is that gold is most likely in a WXY pattern, suggestive of a move back to the 1,262 – 1,143 region before heading up in a final move to the 1,750 – 1,850 region, and then turning down to make a new low below the 2015 low. The alternative to this is that it is forming a very large leading diagonal, where it pulls back to the 1,320 region in a deep wave 4, and then makes a new high into the 1,750 region, then provides a very large multi-year retracement against the entire move up from the late 2015 low. Again, nothing relating to the upside impulse is presently broken to suggest that it can’t or won’t play out. However, if it fails to do so, the downside implications this would suggest to miners is enormous and would once again provide investors extreme multi-month pain.

Gold Weekly Chart

Weekly Gold Chart

Now, allow me to review the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX), below.

As I mentioned above, while GDX can indeed be forming an upside impulse, the pattern suggests otherwise. The wave 2 was anything but swift, and more resembles an X wave in a WXY pattern. It too came up and tagged its 1.382 extension level, of where c = 1.382 x a, as shown by the blue fibs on this chart, and has reversed. Not only has it not taken out its 2016 high, but it has failed to reach .618 extension for a wave 1 of iii. Again, this is not to say it can’t or won’t, but overall, the structure suggests that something different than an outright impulsive move to much higher is playing out here in GDX. Overall, provided GDX maintains below the high established at $29.60 in late September, we would expect the larger WXY pattern to play out, which would suggest a move back to the low $20s in GDX.

It is also interesting to note that we chart many individual miner stocks that are part of our Strategic Miners Portfolio, and these individual miner stock patterns also suggest a larger pullback that matches the analysis provided below on GDX.

GDX Weekly Chart

GDX Weekly ChartLastly, allow me to review the chart pattern for VanEck Vectors/JR Gold Miners ETF (NYSEARCA:GDXJ), below.

In GDXJ, the move up from the 2016 low is a very clear impulsive structure. However, similar to gold, GDX, and HUI, it has a very long consolidation off the high established in late 2016, which again would be uncommon for a wave 2. GDXJ counts very similar to the HUI, in that if it is able to form another 5-wave structure up to the .618 extension at 52.26, then would count best as a i ii 1 setup, where we would then expect a reasonable wave 2 below current levels to provide for a long-term entry. Will it morph into a larger impulsive move that heads straight for the moon? Anything is possible, and ultimately price trumps everything else in analysis, but this structure suggests there will come a day investors can layer into miners at lower than current levels.

GDXJ Weekly Chart

GDXJ Weekly ChartWhile all potentials are still possible, our approach has been to accumulate individual mining stock shares of companies that have passed our rigorous fundamental analysis from much lower levels, and then exit a large portion of those positions near the high. By doing so, we have provided our investors and subscribers with very reasonable profits to allow us to hold current positions through the various machinations that will occur over the coming 12 months. If miners go to the moon from current levels, we have ample exposure to participate. However, if they pull back as we expect in an X-wave, as shown on the GDX chart above, we will be well positioned to add back significant exposure for at a minimum a larger move up into mid to late 2020.

If you are allocating capital to this sector, then be cautious and do not blindly assume that because an Elliott Wave analyst is focusing on only the upside that it will come to fruition. This comment comes from long experience in following and investing in this sector. While anything is possible, the weight of evidence right now suggests that this is a complex pattern that will provide some continued whipsaw in price and, over a long period of time, will provide for better days to enter positions for the very long term.

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.