Strengths

• The best performing precious metal for the week was silver, up 2.87 percent. Investors own the most silver in exchange-traded products in seven months, boosting holdings from a three-year low, according to ZeroHedge. This rebound comes as hedge funds and other money managers hold a near-record bet on further price gains.
• Physical gold ETF holdings have increased by over 270 tonnes since reaching their cycle-low in early January, reports TD Securities, coinciding with an 18 percent rally in the gold price. In contrast, only three tons of gold have been collected so far in India’s newly announced deposit plan. Macquarie raised its 2016 gold forecast for the precious metal by 4.8 percent, while Morgan Stanley announced its gold price outlook for the year up 8 percent to $1,173 per ounce.
• Calico Resources Corp. and Paramount Gold Nevada Corp. announced this week that Paramount has agreed to acquire all of the issued and outstanding common shares of Calico. Particulars of the transaction show that holders of Calico Shares will be entitled to 0.07 of a share of common stock of Paramount, in exchange for each Calico Share held. This represents an implied offer premium of 49.2 percent per share.

Weaknesses

• The worst performing precious metal for the week was gold, still up 0.34 percent. Gold consolidation is underway says UBS, adding that this should be healthy for the market. In its Global Precious Metals Comment this week, the group points out that pullbacks in gold so far this year have been relatively shallow and short-lived, not really offering investors many opportunities to enter at better levels.
• While the Indian jewelry trade continues its stir for withdrawal of the 1 percent excise duty announced in the Union Budget, the finance ministry does not indicate a compromise, reports the Business Standard. The strike entered its seventeenth day on Thursday. One ministry official said, “There is no question of a rollback.”
• B2Gold Corp. announced this week its approval for Gold Prepaid Sales Financing Arrangement, or prepaid sales, of up to $120 million. As stated in the company’s release, the prepaid sales (in the form of metal sales forward contracts) allow B2Gold to deliver pre-determined volumes of gold on agreed future delivery dates in exchange for upfront cash pre-payment. These financing arrangements will help fully fund the Fekola Mine Construction.

Opportunities

• CLSA’s Christopher Wood believes that the European Central Bank’s meeting last week reinforces the fact that central banks globally are addicted to unconventional monetary policies, reports Barron’s. Prior to the Bank of Japan meeting this week, Wood said that pension funds should have 70 percent exposure to the precious metal. Wood’s logic says that as we adjust for rising income, gold could peak again at $4,212 an ounce in an ultimate bull market.
• Bloomberg reports that in Japan, negative interest rates are boosting gold demand (according to the nation’s biggest bullion retailer). The same is true in Germany, where reinsurer Munich Re has boosted its gold and cash reserves in the face of the negative interest rates imposed by the ECB, reports Reuters. Last week the ECB cut its main interest rate to zero and dropped the rate on its deposit facility to -0.4 percent from -0.3 percent.
• Roxgold Inc. announced results from its latest drilling project this week from the QV1 structure at the Bagassi South regional exploration target, 1.8 kilometers to the south of the 55 zone. “Results from this program further confirm the potential at QV1,” stated John Dorward, President and CEO of Roxgold.  These results make a stronger case for owning Roxgold and likely increased the prospect of Roxgold as a significant take out candidate.

Threats

• The CSFB “Fear Indicator” (specifically designed to measure investor sentiment, and represented by the index prices zero-premium collars that expire in three months) has never been higher, writes ZeroHedge. This could indicate that institutional investors are not believers in the equity rally and that there is more demand for put protection, continues the article, a sign of fear in the marketplace.
• Total business inventories have ballooned to crisis levels, according to a report from Macro Strategy Partnership. This can be seen in the chart below which shows the inventory-to-sales ratio. Inventories are up another 1.8 percent year-over-year to $1.81 trillion, and are up 18.5 percent from the prior peak in August 2008 while sales are only up 5.8 percent over the period.

• Barclays thinks that the rally in commodities is overdone, and although economic data has improved, it is not enough to support current prices. With a fragile global economy still in place, the group believes that a turning point for commodities is still some way away.

Gold and gold stocks have refused to correct for more than a few days at a time. Weakness is being bought and quickly. Gold has gained over $200/oz but not corrected by more than 6%. The miners (GDX) have endured three roughly 10% corrections in the past six weeks but nothing greater. A few weeks ago we noted a comparison to the 2008 rally which hinted that miners could correct 20% before moving higher. So far, no dice. Many gold bulls continue to expect a correction while losing sight of the bigger picture: precious metals are in a new bull market. 

Many have expected a correction due to the CoT, which shows a net speculative position of 37.6% of open interest. While this figure appears high, we should note that from 2001 through 2012 the net speculative position often peaked from 50% to 60%. Moreover, everyone has completely missed the rise in open interest, which reached a more than 4-year high! Open interest is not a leading indicator but a confirming indicator. Strong increases in open interest validate the strong increases in Gold. The recent increase in open interest mirrors the increases that followed the 2001 and 2008 lows in Gold.

Gold & Gold CoT

Silver is also defying “conventional” CoT analysis. In recent weeks, Silver’s net speculative position of 43% actually was the highest in more than 5 years! That means Silver has to decline, right? While Silver hasn’t broken above $16/oz yet, it closed above its 80-week moving average (by a penny) for the first time since 2012. Moreover, the recent strength in Silver stocks strongly argues that Silver will move higher. Look for an upside target in the mid to high $18s.

Silver & Silver CoT

There are two problems with the recent, widespread conventional analysis of the CoT. (By the way you can’t swing a dead cat without hitting a “bearish CoT” article or blog post in the past few weeks).

First, bullish and bearish parameters have to adjust during a trend change. In a bear market sentiment usually reaches “extremely bearish” before that market can rebound. Also, even neutral or slightly bullish sentiment is enough to bring about more selling. In a bull market it is the opposite. Sentiment can get really bullish before that market corrects. 

The second point is sentiment analysis can be tricky and counterproductive when a market has just made a major trend change. An extreme sentiment reading during a brand new bull trend is often a false signal because the majority remain on the sidelines. This is why new bull markets recover quickly and remain overbought for months amid bullish sentiment.    

Here are some examples. Recall the huge moves equities made from the 2002 and 2009 lows. Following its 2002 low the Nasdaq rebounded 94% in 15 months and only endured one real correction (15%). Following its 2009 low the Nasdaq rebounded roughly 100% in 13 months and never corrected more than 9%! Gold, following its 1976 low rebounded roughly 62% over the next 15 months and its worst correction was 11%. Gold from its 2008 low rallied roughly 45% in five months and only endured one 10% correction. 

Where are we now?

As we noted last week, if Gold follows the path of the 1976 and 2008 rebounds then it would soon reach $1400/oz and continue to reach higher levels in the months and quarters ahead.

Meanwhile, the gold stocks are certainly overbought but history argues they could trend higher in the months ahead. Note the bull analog chart below. If the HUI follows its 2008 path then it would gain 46% over the next five months and 88% over the next 11 months. If the HUI follows its path after its 2000 bottom then it would rally 128% over the next 16 months.

HUI Bull Analog

While it is very difficult to buy into a market that has already gained substantially, history argues that the larger risk is staying out of that market especially if it only recently made a major bottom. The epic “forever” bear market of 2011-2015 lingers in the minds of many and that is why it is so difficult to believe the recent strength can continue. Hence, many continue to apply bear market thinking and bear market parameters without realizing the sector has made a major character change. That doesn’t preclude the likelihood of pullbacks. We even made a solid case two weeks ago for GDX to correct 20%. It will come to pass soon or later. Going forward, look to accumulate select shares on weakness. Buy and hold. You don’t make money in a bull market by trading. 

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

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