Precious Metals Continue to Experience Significant Gains

Includes: GDX, GLD, IAU, SLV
by: Investing The Middle Way

Since my call to buy the dips last Tuesday, the Precious Metals sector has performed admirably. Gold spot has gained for four consecutive days while the Amex Gold BUGS Index (HUI) has bounced strongly off its 50 DMA. Looking back at the gold site traffic as the sentiment indicator I presented last time, a strong case can be made for having already entered wave (3) of iii of 3 of III which should bring some breathtaking advances.

My labeling of the Elliott wave pattern is found in the following chart:

The just-ended wave (2) is a corrective wave that is composed of legs a, b, and c. Normally, one expects wave c to end lower than wave a, however the chart is complicated by the unwinding of SocGen (OTCPK:SCGLY) trades. If we take a look at the line chart which plots closing prices only, it becomes clear that wave c did end lower than wave a. In addition, wave (2) is contained in a downward trend channel. If my labeling is accurate, an upward breakout of the channel should be imminent.

It's always important to pay attention to the ratios to see the relative valuations. For example, the XAU:GOLD ratio recently dipped below 0.2 (gold/xau above 5), which according to John Hussman represents a good buying opportunity in gold stocks.

The chart below compares the silver/gold ratio to the HUI/gold ratio. In recent years, notable lows in silver/gold either coincided or slightly lead notable lows in HUI/gold. Perhaps it's because both are more speculative and leveraged plays on gold and it takes time for the underlying trend in gold to be recognized. By and large, both ratios move in the same direction, which begs the question: how should the current discrepancy (circled in red) be resolved?