We started writing our weekly update right before the markets opened on Friday 28th. Based on the closing prices of Thursday, the charts indicated the the metals and miners were at a “make or break” point. At the time we finalized our article, its content was totally outdated: metals and miners had broken down.
Let us review the charts and try to define what is in the cards.
For gold, there are basically two trendlines at play. The key support level at around $1,200 is going back to April 2013 and has been touched (tested) three times. We broke below that trendline in early November but we saw a bounce in the last weeks. Looking back, it appears to be a dead cat bounce, at least for now. Gold did not manage to hold support and, consequently, it has become resistance.
The second trendline connects the July peak with the lower lows. The sad thing for gold bulls is that the metal did not manage to even touch (test) the trendline recently. That does not bode well for the near future.
There are two potential evolutions which could help the yellow metal. The first one is this weekend’s gold vote in Switzerland. Although the recent propaganda machine of the Swiss politicans and central bank has been remarkably focused against gold, there is a small chance that the Swiss citizens would vote “yes”. On the other hand, if gold would successfully test its recent bottom around $1,135, it would be a very healthy sign. We consider the probability of both events lower than 25%. So the most likely scenario which is about to take place is one of a total wash-out bottom, with a fair chance of capitulation in the gold miners. We consider this scenario to have a probability of 50%.
The picture in silver is worse than gold. As the next chart shows, the breakdown since September has become structural. This week’s test of the declining trendline was unsuccessful. Lower prices are in the cards. As we have seen since July of this year, silver has been leading gold lower. That is and remains the trend until it is invalidated by a break above recent trendlines.
The situation of the gold miners is somehow comparable with the one in gold, it is not as bad as in silver. However, we believe it will become worse before the trend changes. Our estimate of a scenario with capitulation in miners is 50%. The reason behind our thinking is based on tax loss selling which is still taking place in December. A replay of last year’s scenario, where the miners put an intermediate term bottom on December 31st, is likely. As we are trading at lower lows, however, we believe that capitulation can take place. Although painful, it would be very good news, as quality names would trade at ridiculously low prices and it would mark the end of the 3.5 year bear market.
Make no mistake, however. Capitulation means that prices are literally in free fall. That period usually lasts some 2 weeks, but it is very ugly. Prices could fall another 30% or more in that time period. Considering that miners are trading 80% below their peak of 3 years ago, it would imply that it could be the trade of a lifetime. We are not there yet, but, as always, a close monitoring of the ongoing market development will provide indications in which direction we are heading.