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Chart 1: TDG Junior Gold Index
Here is a daily candle chart of our index which includes the 400-day moving average and the 350-day exponential moving average, which has provided support during corrections in bull markets.
The index closed at 629. We are looking for a move back to 700-725. We project downside potential to 475 amid $1050 Gold. That is roughly 25% from here. We had been hoping the index would hold 700-725.
The price action of this specific index (the bearish looking top) is another reason I lean bearish for the medium term. The strongest companies (fundamentally) are not showing any relative strength.
Late Saturday evening we sent TDG #492, a 32 page update which contained our usual technical work as well as thoughts on each of our holdings and where they stand. We noted which stocks we were prepared to hold and which ones we would sell after this bounce.
If the 2016 bull market remains intact then this coming rebound will need to be strong and sustained. Otherwise, we see Gold breaking below $1200 and forming a final bottom early next year. The gold stocks would obviously decline in tandem but I expect they form a higher low rather than a double bottom.
In our summary we discussed the backdrop that could evolve into a catalyst for the sector. Simply put, we need to see stock market weakness and probably economic weakness. Nominal GDP growth and inflation should rise under Trump but his policies may not begin to affect the economy until 2018. In other words, inflation may not accelerate until 2018. Thus, Gold may need lower yields in the first half of 2017 which would result from stock market weakness and economic weakness.
In short, keep your eyes on the stock market.
The precious metals sector is very oversold right now. We have rebound targets of GDX $23.50, GDXJ $39 and Gold $1250-$1270. As we near these targets we will look to hedge our portfolio. In the meantime we will use strength to sell a few positions that figure to be vulnerable to sub $1200 Gold. There is one position we are looking to increase.
Simply put, cut your losers and hold onto your winners.
The next few quarters could be really tricky. If Gold breaks below $1200, I expect many bulls to throw in the towel and they could be doing so at exactly the wrong time. People will overthink it and risk missing the next rebound. In my opinion, the sector is poised to rocket higher and sustain it after the next low.
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