Gold and Silver rebounded following the Fed minutes released last Wednesday. However, one week later both metals are back below pre-Fed levels and moving dangerously close to important support. Silver fell 2% on Tuesday to $15.81/oz, which is only 2.2% above its lowest weekly close of $15.46 which occurred seven months ago. Meanwhile, Gold closed at $1177/oz, which is only $20/oz from its lowest weekly close. In short, precious metals are flashing code red as a breakdown could begin in the next few weeks.

Gold has held in over the past few months but its recent price action suggests trouble is ahead. Take a look at the daily chart below. Gold has failed twice in the past five weeks at its 200-day moving average. First at $1220 and a few days ago at $1207. Gold is now trading below its 50-day and 200-day moving averages and both are sloping down. We highlight the last two times Gold traded below both moving averages. A previous case was in 2015 right before Gold crashed below $1500/oz.

I’m hearing from some that sentiment is too negative and the bear has gone on too long for Gold to breakdown. The problem with that is the data argues otherwise.

We plot a weekly line chart of Gold and we include its volatility index ($GVZ) as well as the net speculative position (bottom). Gold’s volatility peaked above 60 during its 2008 bottom and above 30 at its June 2013 low. At present its near multi-year lows. Meanwhile, the net speculative position which fell to 5% and 6% during 2013 was last at 18%. There are still speculators in the market who can sell and drive Gold lower.

Staying with sentiment, we recently collected all global put-call data for GLD, SLV, GDX and GDXJ. Its another data point we provide to subscribers. We plot Gold and GLD put-call data (smoothed with a 20-day moving average) in the chart below. No indicator is perfect but lows in Gold have corresponded closely with peaks in the 20-dma. The 20-dma has started to rise but remains quite a distance from those previous peaks.

Simply put, the price action in Gold is very bearish and current sentiment (not big picture sentiment) is nowhere near an extreme. This is potentially a very dangerous time for gold and silver bulls. At somepoint (perhaps in a few months), the switch will flip and we could have some epic buying opportunities in the precious metals complex. We are positioned to take advantage of this decline so that we can take advantage of those future opportunities.

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Strengths

• Gold traders are the most bullish in a month on the prospect of slower U.S. interest rate increases. Gold saw a second weekly advance after efforts to secure a Greek bailout faltered and the Federal Reserve signaled a more dovish stance on interest rate increases. Shanghai Gold Exchange withdrawal volume in the week to June 12 came in at a strong 46.2 metric tonnes.
• The Bank of China will become the first Chinese bank to join the auction process that sets gold prices in the London market. The bank, along with seven other lenders, will start participating in the twice-daily electronic auction. The addition of a Chinese bank is another sign that China is increasing its influence in gold and currency markets worldwide.
• Cornerstone Macro’s survey shows that neutral investor sentiment is at a 25-year high, with both bears and bulls disappearing. Such ambiguity could quickly translate to panic given a rise in volatility in the markets.   
• The gold monetization scheme in India aims to unlock the value of jewelry sitting idle. However, the current plan may not be enough to lure people to park their gold in a scheme that offers one gram for every 100 in a year. Furthermore, it may prove difficult to overcome people’s sentimental attachment to their jewelry assets placed on deposit as they will be melted for only a 1-percent return.

Weaknesses

• Morgan Stanley sees gold prices under pressure for the rest of the year given expectations for an increase in U.S. interest rates along with subdued retail demand. They also mention the rapidly strengthening equity markets in China drawing investors away from gold as well as the heavy rains in India putting a dampener on Indian demand.
• The managing director for the Far East region at the World Gold Council said that a gold upheaval is unlikely when the U.S. raises interest rates. Instead, higher rates may create adjustments in the gold market. Additionally, Kitco Metals noted sales are down 13 percent from this time last year. Silver sales are down 17 percent.
• According to Metals Focus, silver prices will likely average in the high $15-per-ounce level during the summer but rise to the $16 level in the fall. Average prices in 2015 are likely to be about 15 percent lower than last year, but rise about 10 percent in 2016 as the uncertainty over interest rates fades with the expected gradual increase in U.S. rates. Weakness in platinum is apparent with prices slumping to a six-year low.

Opportunities

• China continues to be one of the world’s largest buyers of gold as shown by the increased offtake of physical deliveries from the Shanghai Gold Exchange as the country is working towards establishing the renminbi as a reserve currency.  Another factor that could drive gold higher could be a rotation of funds within the country.

• Policymakers squelched the run in the Chinese real estate market, pushing billions of dollars into the country’s stock market. If Chinese investors suddenly sour on stocks, their next move could be to gold. Furthermore, Paradigm Capital published a study looking at what the next gold upcycle might look like. Taking into consideration the past five upcycles, they determine there is an 80-percent probability that gold will average over $1,540 per ounce, and could move much higher than $1,940 over the next three to four years.

• Low interest rates, private equity and some miners flush with cash while others are in need of major debt reduction, may cause a sharp increase in precious metals mergers and acquisitions (M&As) this year. Bloomberg shows that deals for gold mines reached a two-year high in the second quarter and the premium paid for public gold companies soared, and was the second highest over the past 12 years. This bodes well for further consolidation in the industry and highlights how cheap current valuations are.
• Klondex Mines reported that the Water Pollution Control Permit for its Fire Creek project is in hand, and the tonnage cap linked to Fire Creek’s operations is now lifted. Upcoming catalysts include resource updates for Fire Creek and Midas incorporating positive drill results released this year, the Midas TSF expansion permit to increase tailing storage capacity, a potential U.S. listing and inclusion in major gold equity indices, and the Fire Creek Environmental Assessment approval.

Threats

• A record number of investors told Bank of America Merrill Lynch this month that they have taken out protection against falling stocks over the next three months. According to Alan Ruskin from Deutsche Bank, 2015 will go down as the year when major central banks hit an inflection point in their willingness to distort and manipulate markets. Thus, the mix of overt and subtle withdrawal of market support is a key macro driver of recent market volatility.
• Apparently regulators care much more about manipulation of the stock market than gold. This is because the sentence handed down to Mirus Futures for allegedly spoofing the gold futures market in February 2014 was only $200,000, while Nav Sarao, the kid who allegedly spoofed the S&P 500 Index in 2010, could spend up to 380 years in jail.
• According to the latest plans for a gold monetization scheme in India, sovereign gold bonds will provide a good alternative for investors, and if subscribed fully in the first year, it will result in a saving of $2 billion on imports of bullion at current prices. This would represent 27 percent of the 2014 investment demand. The rate of interest will be linked to the international rate for gold borrowing, but with 2 percent as the indicative lower limit and interest rates will be paid in terms of grams of gold.

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It was another volatile week in the markets. The interest rate decision by the U.S. Fed on Wednesday was a non-event with no change in the Fed’s monetary policy. The market reacted with a spike in stocks, bonds, and precious metals, while the U.S. dollar took a dive. Also, the unfolding drama in Greece spooked markets and metals; stock markets are nervous while metals mostly get bids each time the Greek crisis flares up.

We focus on gold’s seasonality in this column and what it could mean for gold’s secular trend.

Between 1982 and 2012, gold typically started rising in early July, corrected slightly in October, and finished the year strongly higher. The first chart, courtesy of our friend, author, and market analyst Dimitri Speck, shows that the second week of June typically kicked off the yearly rise with a final dip.

Courtesy: Seasonal Charts

Included within that 30 year time frame was a secular bear market (until 2001) and a secular bull market (as of 2002). We look more closely at gold’s seasonality since the secular bull market started in 2002. The second chart, courtesy of

StockCharts, shows the number of months in which gold closed higher than it opened. Clearly, July through September stand out with the largest number of higher monthly closes, while October is one of the weakest months in the year.

The same seasonality picture for the period between 1990 and 2000, the last decade of gold’s secular bear market, shows a random picture of up and down months, without a consistent rise during the summer months. We assume that is typical behavior during a weak market.

We conclude that gold bulls want a strong summer which will confirm that the gold secular bull market is still intact.

Looking one level deeper into the summer rallies in the current secular bull, we found some interesting insights. The table below shows the exact period in which gold had a summer rally, along with the % price rise in USD. Interestingly, we see that gold started to rally between June and mid-July in 8 out of the last 10 years. Over that same period, the average price rise during those rallies was 16.3%.

What does this mean in the context of the current cyclical bear market within gold’s secular bull? To answer that question we rely on the long term trendlines on the weekly and monthly charts. The trendline on the weekly is marked in red.

The general rule is that the significance of a trendline increases substantially with every touchpoint. The red trendline on the weekly chart has the highest number of touchpoints. We believe that gold broke out mid-March of this year, as indicated with the green oval. One could argue that the breakout went unnoticed, as few have spoken about this “event,” concluding that it was unimportant. Our view is the opposite. Because it went unnoticed during a cyclical correction (bear market), it increases the odds that it was THE important event. That is how bear markets end, and especially when nobody talks about it.

This summer’s seasonality is quite important. If gold’s summer rally is strong, we will conclude two things. First, we will have a confirmation of the seasonal trend during the secular bull market, increasing the probability that the secular bull is still intact. Second, the probability increases that the breakout point already occurred in March.

However, even if the summer rally does not occur and we see a continuation of the sideways pattern, there is still evidence that gold remains in a secular bull market. The next chart shows that the secular trendline marked in blue will touch the $1200 price level in about a year. That means gold can trade sideways for a year without invalidating its secular bull trend.

Smart investors do not anticipate a particular move, they prepare themselves for what is likely to happen. A breakout in gold and silver is a high probability move. That is why we recommend an investing roadmap based on the very best gold and silver plays.

It is our duty to select those investments in the Gold & Silver Report!