Gold and silver have pulled back significantly for various reasons in the last few weeks. The most popular ETFs that track these metals, the SPDR Gold Trust (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA:SLV) are now trading down on the year, at $152.97 and $27.83, respectively. However, there was some rebound Thursday and sideways action Friday in these ETFs as the metals stabilized, at least for now. Many traders has been expecting a stronger rebound following the large downside moves. In contrast, several of the gold miners had a strong rebound day Thursday, led by another stellar quarter from Yamana Gold (NYSE:AUY). The gold miners index (NYSEARCA:GDX) rose 1.8% to $38.12 while the junior gold miners index (NYSEARCA:GDXJ) added 1%, rising to $15.95 on Thursday. On Friday, the GDX gave a little back while the GDXJ moved slightly higher again. The GDX and GDXJ closed at $37.92 and $16.21, respectively. This week I expect the miners to rebound a bit in the next few trading sessions. This is because from a technical standpoint, they remain in oversold territory, their relative strength index reading is still less than 30. Generally this leads to some bargain hunting buying.
The rebound in the metals Thursday and Friday was led by the action in Comex gold futures, which saw some gains. The futures prices ended the U.S. day session Thursday modestly higher, and settled in Friday at $1580.40. This came after hitting a new 8 month low in overnight trading Wednesday into Thursday. Some of the rebound was likely due to short covering as well as some muted bargain hunting following the recent strong sell off. The action in March Comex silver leveled off to end the week, where it traded up slightly to $28.70 an ounce Friday. The rebound overall was muted for several reasons. The stronger U.S. dollar index is another bearish impetus for the gold and silver markets likely limited buying interest in the metals. Further, the recently hawkish Fed Open Market Committee [FOMC] minutes left questions for the near term future for the metals.
Fed FOMC Minutes
The expected rebound in gold and silver were stunted a bit because market participants were still taking in the release of the Fed's FOMC minutes from early January. Those minutes indicated that U.S. economic conditions are improving to the point that some FOMC members, in a very hawkish change in tune, think its massive quantitative easing policies may have to be changed soon, through reducing asset purchasing. The Fed FOMC will of course further address the issue at its next meeting in March, and the minutes from this meeting will be closely scoured. But was there really anything in these minutes to justify the sell off, or muted rebound? Overall, there was not a consensus among FOMC members on whether to cease asset purchasing sooner than anticipated just months ago. Further, if the Fed proceeds with utilizing the unemployment rate for its monetary policy decisions, then it seems obvious to me that the flow of easy money policy will continue for the near future. Ben Bernanke who championed this historic dovish monetary policy in the United States, has offered little in the way of suggesting he is no longer standing by the policy, which for now is good for the bulls.
In reaction to these minutes, the European stocks and the euro (NYSEARCA:FXE) were sold down in the last sessions of the week, following the drop of the American markets Wednesday afternoon. In addition, European markets were impacted by less than stellar eurozone purchasing managers' data which suggested the eurozone is still experiencing economic contraction. Further, the U.S markets pulled back Thursday and they somewhat rebounded on Friday. Asian stock markets were hit hard in the last few days of the week, particularly in China. China's stock market dropped sharply after Chinese officials reiterated the desire for domestic property prices to remain at levels that are attractive for investment. The markets sold off on this news, on the thoughts that China may tighten their money supply to maintain property prices. China's central bank further is making a significant move into cash this week in an effort to make sure inflation stays at bay, which is definitely a headwind for gold and silver prices.
The U.S. Dollar
The U.S. dollar index was up Thursday and Friday, and even worse for gold and silver, hit a fresh three month high. The U.S. dollar certainly has had strong upside momentum lately, and thus is likely that a short-term bottom is in. Prices could likely move sideways to higher in the near-term, or reverse course and test the 50 day moving average. The movement in the dollar index in the next few weeks will be critical for gold and silver in the near-term.
Some data suggested demand for gold bullion in India is increasing due to the recent sell off leading to bargain hunting. As stated above, there was a small rebound, led by both the short covering and bargain hunting to close the week. Technically, the market is highly oversold on a short-term technical basis. Near-term technical damage has occurred recently, as most famously the 50 day moving average moved below the 200 day moving average, which is known as the death cross. This cross suggests further downside is possible in addition to the fact that gold prices are in a now six-week downtrend. While technicals suggest this could happen, it does not guarantee it. Gold's next upside near-term price breakout objective is to produce a close above solid technical resistance at this week's high of $1,618.80. Gold's next near-term downside breakout price objective is closing prices below solid technical support at the May 2012 low of $1,538.70. First resistance is seen at Thursday's recent of high of $1,584.40 and then at $1,590.00. First support is seen at $1,570.00 and then at $1,560.00.
March silver futures prices closed near the session high on trading action similar to gold. Silver held steady, rising a bit due to some short covering and some likely bargain hunting. On Wednesday, silver hit a six month low. Silver is in a technical downtrend like gold, and will be searching for a bottom. It may come soon as the silver market is also short-term oversold. Silver's next upside price breakout objective is closing prices above solid technical resistance at $30.00. The next downside price breakout objective for the bears is closing prices below solid technical support at $28.00. First resistance is seen at Thursday's prices of $28.88and then at $29.00. Next support is seen at Wednesday's low of $28.31 and then at $28.00.
Short-term the metals have been under pressure. For the long-term investor, this significant sell off is a buying opportunity to expand holdings in physical assets and in the mining stocks. While there is possibly more downside ahead, for those looking to establish positions, this sell off is presenting the chance to do so. I recommend buyers to pyramid into their holdings, increasing their buying on the way down in increments. We must closely watch the technicals for a bottom formation, as well as monitor macro level news, which could make the technicals irrelevant and either accelerate the sell off, or result in a reversal in the recent direction of the precious metals.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.