Precious metals are closing the week out with a good rally. The Federal Reserve nonsense proved to be a catalyst as it can be in either direction. Regardless of the Fed, the precious metals sector was oversold and due for a bounce. We wrote about that last week. Maybe this could be the bear market bottom. Maybe not. It concerns us that Gold is rebounding from an area of insignificant long term support amid sentiment that is not at a bearish extreme. Extreme bearish sentiment coupled with very strong support raises the probability of a major rebound or bear market bottom. I don’t see that for Gold, yet.

Below is a weekly line chart of Gold with its net COT position at the bottom. Gold will close the week around $1180/oz and avoid a break below the channel. However, Gold’s COT is far from a bearish extreme. Gold’s three best rallies in the past two years began with its net speculative position at or below 10% (of open interest). As of last Tuesday the net position was 22%. Gold may need this to be below 10% before it can bottom.

In the next chart we plot the premium/discount to net asset value (NAV) for a pair of closed end funds. CEF (which is

shown at the top) is a closed end fund that owns Gold and Silver. GTU is a closed end fund which owns Gold. Both funds are currently trading at +7% discounts to NAV. While a 7% discount is big it is well below the largest discounts seen in late 2000 (~18%) and late 2014 (13%). GTU’s largest discount was 12% in late 2014.

Interestingly, the mining companies aren’t expecting or may not be prepared for $1000-$1100/oz Gold. The graph below is from consulting firm PwC. Look at how few companies are valuing their reserves and resources at sub $1200 Gold!

With the sector in a downtrend, bulls need to see some combination of extreme bearish sentiment, extreme oversold conditions and strong technical support. Metals and miners are rallying so sentiment figures to improve a bit before it can reverse course. In the big picture sentiment is quite bearish but the indicators argue it’s not quite at an extreme. The COT is one example and the premium/discount in closed end funds is another. Technically, Gold does not have strong support until well below $1100/oz. We’d like to see Gold falling below $1100/oz, getting more oversold and nearing strong support with sentiment reaching bear market extremes. Those are the conditions for great buying opportunities that can lead to a bear market bottom.

Greg is completing his exclusive report Gold & Silver: Preparing to Rise & Shine for MoneyTalks this weekend! Ensure you can get a copy at the special discount price of $49.95 – 90% off!.

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MoneyTalks Editor

Here are today’s videos:

US Dollar ETF (UUP) Consolidation Charts Video Analysis

Gold $1240 Target Zone Charts Video Analysis

Silver Triple Play Charts Video Analysis

GDX I See Green Shoots Charts Video Analysis

GDXJ $25 Target Charts Video Analysis

Lakeshore Gold Solid Uptrend Charts Video Analysis

The precious metals sector is oversold and due for a bounce. Miners and metals have endured severe declines in recent weeks and are likely to rebound from the 2014 lows. The miners are just starting to rebound and the metals should follow. However, until proven otherwise this appears to be an oversold bounce that could last only a few weeks. Potential danger lies ahead before a sustained turnaround.

Below is Gold’s weekly line chart dating back to 2007. The metal has traded within in a slight descending channel for nearly two years. A break below such a channel would typically lead to an accelerated decline. If Gold makes a clear weekly close below $1150/oz then it could start to break lower in accelerated fashion towards $1080/oz, the 50% retracement of the entire bull market. Gold does not have strong support until the $1000 to $1040/oz range. Also, though Gold is extremely oversold in a long term sense, that is not the case from a near term view. A move below $1080/oz within the next seven weeks would bring Gold to an extreme near-term oversold condition.

Gold Weekly

The gold stocks are entering the fourth year of their bear market and have essentially repeated the 1996-2000 bear market. In the chart below we compare the HUI’s current bear with its 1996-2000 bear. Note that the HUI made a marginal new high five months after the majority of mining stocks peaked. Otherwise its resemblance would be even closer to its 1996-2000 bear.

HUI Bears: 2011-2015 & 1996-2000

A few weeks ago we posited that gold stocks could hold the recent lows and perhaps form a huge double bottom. That is now highly unlikely as the sector sold off aggressively when Gold lost $1200. The HUI, trading around 160 has support at 150 to 160. Like Gold it is not yet extremely oversold in the near term sense and lacks immediate downside support. The indicators shown on the chart have much further to go before they reach the extremes seen in 2000, 2008 and 2013. Traders and investors need to be aware of the severe downside potential before a bear market bottom.

Gold bugs should strongly consider using any strength to defend themselves against the potential downside that lies ahead. Other than at $1080/oz, Gold does not have strong support until $1000 to $1040/oz. The HUI lacks strong support below 150. Also, gold miners tend to have severe losses before major bottoms. During the financial crisis the HUI declined roughly 50% within a month of its final low. The HUI also declined 34% during the last two months of its 1996-2000 bear. It’s important to note that this is a small sector and forced selling by a few funds can exacerbate losses. A break below 150 HUI could get quite ugly but it would ultimately lead to a spectacular V bottom.

Jordan Roy-Byrne

Jordan@TheDailyGold.com