Yesterday afternoon O&M Partners asked me to give a short presentation (I didn't realize quite how short until I had already constructed a longer presentation) on precious metals and junior mining stocks. Lengthy topics to say the least!
My goal was to start at the macro level (where gold and silver are on the longer term charts and where they might be going), and then hone in on how to potentially profit from a further rise in gold and silver through mining shares, in particular junior mining shares such as Great Bear Resources (TSX-V:GBR) and Westhaven Ventures (TSX-V:WHN).
Here are some of the key charts I used:
Silver (Daily - 4 Year)
During the most bullish phases in precious metals, silver has a tendency to "lead" gold. For example, in 2011 silver peak in late April at $49.85 per ounce while gold didn't peak at over $1900 per ounce until nearly four months later. Silver has "golden crossed" (50-day SMA crossing above 200-day SMA) much like it did in Q1 2016. I am looking for a breakout on a weekly closing basis above the downtrend line drawn in purple on the above chart to confirm that silver is indeed in a new bullish cycle.
Such a breakout could speak volumes across the precious metals space.
The next chart is a longer term chart of gold illustrating how many times it has bumped its head on the resistance between $1360 and $1377 in the last 3 years:
Gold (Daily - 10 Year)
On the evening of April 14th, 2013 gold futures opened on Sunday evening with a gap lower and proceeded to tumble more than $200 per ounce in a complete free-fall over the next 18 hours. This "gap" in the chart is still open and in my estimation it will inevitably get filled in. The only question is, when?
A breakout above $1377 is likely to result in a much larger move higher, above $1400, and potentially all the way back to $1560.50 to fill the gap from April 2013. Famed technical analyst and market timer Tom DeMark has written that the strongest technical breakouts often occur by way of overnight (or over the weekend) gaps. I wonder if one Friday not too far from now gold might close the week in the $1360s and open the following Sunday night north of $1400 due to some unforeseen catalyst.
Gold mining shares tend to offer between 2.0x and 2.5x leverage to gold price movements during bullish phases. However, junior gold explorers can easily deliver 10x or 20x returns in bullish gold environments depending upon a multitude of factors (including whether they deliver a new discovery). During bearish phases junior explorers can also suffer 90%+ declines. That's why it helps to figure out whether the wind is at our back or hitting us in the face.
Are we in a bullish cycle or a bearish cycle in gold mining stocks?
Gold Bugs Index (Monthly - 20 Year)
To answer this question we need to figure out if the bear market ended in December 2015 OR if we are still in the bear market and just don't know it. The Gold Bugs Index (HUI) hasn't made a lower low (lower than December 2015 low), but the gold miners are also well below their 2016 highs. It's a tricky situation and there is no clear answer.
My thesis is that the above mentioned chart of silver will give us a lot of answers over the coming weeks; will silver break above the downtrend line or will it sink back below $15.00? Depending upon how the silver chart resolves, we will get a lot more information as to where we are in the precious metals cycle.
The other chart I will be focused on is the chart of the Gold/S&P 500 ratio:
Gold/SPX Ratio (Weekly - 8 Year)
The Gold/SPX ratio has declined from more than 1.65 at its 2011 highs to less than .50 today. If we are to be in a precious metals bull market the gold/SPX ratio should be in a confirmed chart uptrend, which it is not right now.
However, that could be changing very soon depending upon how the following chart pattern plays out over the coming weeks:
Gold/SPX Ratio (Weekly)
The right shoulder of this potential head & shoulders bottom hasn't fully formed yet. But if it does, and the gold/SPX ratio eventually breaks the neckline near .52, it would send a powerful signal that a turn is at hand and one should probably raise exposure to precious metals and mining shares.
I will save the rest of the presentation for my next post. In it I will delve into the junior mining sector and why one might want to invest in this sector. More importantly, I offer some tips on what to look for and what to avoid, in addition to discussing how much of ones portfolio one might want to allocate to these smaller stocks.
DISCLAIMER: The work included in this article is based on current events, technical charts, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. The views expressed in this publication and on the EnergyandGold website do not necessarily reflect the views of Energy and Gold Publishing LTD, publisher of EnergyandGold.com. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource companies can easily lose 100% of their value so read company profiles on www.SEDAR.com for important risk disclosures. It’s your money and your responsibility.