We are witnessing tension build in the precious metals sector as volatility contracts near key levels of technical resistance; silver has now closed either at or within pennies of $18.25 for 8 straight sessions, near record low levels of volatility. Meanwhile, gold continues to oscillate around the $1250 level just below its 200-day moving average. 

The gold miners as represented by the GDX have quietly closed higher for 5 consecutive sessions and above their 50-day moving average for 3 consecutive sessions:

GDX (Daily - 1 year)

This is one of the most interesting moments in gold mining shares in recent memory:

  • Realized volatility has declined by ~50% since mid-November as price has essentially gone no where during the same time span.
  • The last couple of weeks we have seen GDX bump up against the $23.50-$23.60 resistance area which also happens to be the 38.2% Fibonacci retracement of the August-December 2016 decline.
  • After many weeks of significant underperformance by mining shares relative to gold and silver we have seen a subtle outperformance in the last week with GDX rising by more than 4% while gold has risen less than 1% over the same time frame. 
  • Anecdotally I have noticed that investors have begun to pay less attention to the precious metals sector, perhaps bored by the recent tight range-bound trading. Sentiment is very much in neutral territory. 

When price butts up against an area of resistance so many times in such a short time span it usually means a dramatic resolution isn't far off, and that dramatic resolution can often come by way of overnight gap. The large drop in realized volatility and recent divergence in implied volatility (via the GVZ) only serve to add weight to the thesis that a large move (either up or down, although my bet is up) is fast approaching:

GVZ (6-month)

As realized volatility in gold, silver, and mining shares has continued to make fresh lows the GVZ (CBOE Gold Volatility Index which is derived from GLD options pricing) bottomed weeks ago and has begun to turn higher. 

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