We can observe an increasing number of encouraging signs in the precious metals complex.
First, the price of gold keeps on consolidating. It is not eager to rally, but it surely is not eager to break down neither. Compare this chart set up in the last 12 months with the one in the first quarter of 2013. Do you see the difference? The ongoing chart formation is less aggressive but much more smoothened. That’s a friendly consolidation pattern.
Second, the mainstream media has given up on the metals. Remember one and two years ago, how many articles appeared on the metals? Remember also how brutal the tone of voice was? All that is gone. The precious metals are quasi non-existing. That is the perfect setup for the start of a new bull market, mark our words.
Third, we witnessed the bankruptcy of a large miner: Allied Nevada. It was surely one of those loved miners, which was a “must have” in all portfolios. Now the company is worth 0.1% of what it was at its top of 2012. A combination of a financial mismanagement, no competent management team, wrong decisions, etc led to the bankruptcy of the company, as announced last week. The chart says it all.
These are encouraging signs because they suggest a “catharsis” is ongoing in the sector.
Going forward, we can expect a continuation of this consolidation period. Say, more of the same, for one or two years for instance. Maybe it will take a bit longer, maybe it will be a bit shorter. Planning the start of the new upleg in advance is impossible, so investors should stay very alert for trend changing signals on the charts primarily, but also in the market.
The point is that there will be more bankruptcies before the new bull market starts. There will be more dead rallies. There will probably also be a fakeout breakdown, which would scare the very last gold bull, but give false hopes to the large group of bears. That is the typical pattern of a cyclical bottom formation (consolidation).
The take-away is that the longer the consolidation period goes on, the sharper the trend reversal will be. What we know from history is that, once the bear goes into hybernation, a very aggressive bull wakes up. The key is to recognize that trend change, and adapt your positions and portfolio accordingly.