Introduction Note Travis
Travis’s Note: This article was originally published for members on August 17th, 2018.
Volatility is certainly creating opportunity, as I opined in a recent member update, and one sector that has been crushed over the course of 2018, and particularly over the past month-and-a-half is precious metals equities.
Building on the narrative, sentiment for precious metals is plumbing rarely seen depths.
Despite the doom and gloom in the sector, many precious metals equities are poised to make higher lows than their 2016 lows, despite precious metals themselves already testing these lows.
Thus, a contrarian opportunity may be at hand.
Read on further if you are interested.
Precious Metals Equities Have Been Crushed
Look at the charts below for perspective.
First, lets start with gold (GLD) and silver (SLV).
Now on to the precious metals equities themselves, specifically the ETF’s (GDX), and (GDXJ), and Barrick (ABX), Pan American Silver (PAAS), and Wheaton Precious Metals (WPM).
In the short-term, all these charts are a series of waterfall declines. Simply put, short-term price action has been terrible.
Longer-Term Charts Look Better
Taking a step back, and looking at the longer-term charts shows some constructive developments.
First, gold and silver are near their 2016 lows already, with silver weaker than gold by this measure.
However, the precious metals equities have generally held up better, meaning they are not as close, in percentage terms, to their 2016 lows as the precious metals themselves.
From the long-term charts above, even though we are in a waterfall decline now, perhaps nearing the end of it, but only time will tell, it sure looks like we are going to make a higher low in precious metals equities compared to the precious metals themselves. This is a very positive divergence, in my opinion, and it is suggestive of higher precious metals equity prices.
Looking at this from another perspective, specifically the ratio of GDX (a proxy for precious metals stocks) versus GLD, shows that GDX has continued to outperform since the late 2015/early 2016 lows in precious metals equities.
In summary, early 2016 marked the end of a roughly six-year time frame where precious metals outperformed the precious metals equities.
Looking back, the failure of precious metals equities to outperform when gold and silver were making highs in 2010 and 2011 was a warning sign, and the opposite is occurring over the past several years today.
The Dollar’s Surge Is Playing A Part
The U.S. Dollar has rallied strongly in the short-term.
However, a bigger picture perspective yields a different conclusion.
Specifically, the Dollar is still below its 2015-2017 highs, which is interesting considering the risk-off emerging market sell-off, record interest rate differentials, and material out-performance by U.S. equities.
If the Dollar cannot make new highs today, perhaps all the good news for the Dollar is priced in, and this is a negative divergence?
Sentiment For Precious Metals Equities Is Abysmal
Sentiment readings are at the bottom of the barrel for precious metals equities and near the top of the range for the U.S. Dollar.
With such terrible sentiment readings, it would not take much for a significant oversold bounce to develop.
Takeaway – Trading Opportunity & Potential Long-Term Entry Point
From my vantage point, there certainly appears to be a compelling short-term trading opportunity developing in precious metals equities.
Additionally, as I wrote about earlier this year, there is long-term merit in the fundamentals for precious metals equities too.
More to come on this front,
Travis