Jordan Roy-Byrne, CMT | May 13, 2013 04:50PM ET
While Gold has seen a decent rebound, Silver and the mining shares (the more speculative side of the complex) have failed to sustain any rebound despite tremendously supportive sentiment amid an extreme oversold condition. Is the failure to rebound bearish? Not really. This is a sector that is completely sold out but there has yet to be enough buyers to generate a sustained rebound. The combination of strength in conventional asset classes (stocks and bonds) and poor performance over the past two years is causing this sector to read like the heart rate monitor of a heart patient. The sellers are gone and the buyers are scant. We believe the bottom is in and a rebound should begin very soon. However, we are more concerned with what will be the driving force for a sustainable rebound, which will evolve into a new cyclical bull market.
Clearly, precious metals won’t sustain a rebound until the S&P 500 completes its cyclical bull market. This is something we’ve pointed out since late last year. That said, never did we expect the equity market to climb this high. Since summer 2011, the gold stocks are down more than 50% while the S&P is up 45%. Meanwhile, the Goldman Sachs Precious Metals Index is down 25%. When stocks and bonds rise, there is no reason for the majority to consider alternatives such as precious metals.
That is what happened in the 1976-1981 cyclical bull, which ended the previous secular bull market. In the chart below we note that commodities bottomed at the very start of 1975 while Gold didn’t bottom until the second half of 1976. Interestingly, Gold then dramatically outperformed commodities and peaked first.
While the U.S. economy will likely remain stagnant, the sudden torrent of interest rate cuts in the rest of the world could stimulate global inflation in 2014 and beyond. Recently, Australia, India, Vietnam, Brazil, Russia, South Korea, Poland and Sri Lanka have cut rates. Thailand and China could be next. The ECB cut rates and hinted that QE could follow. Japan of course takes the cake. Global monetary policy is becoming increasingly inflationary and that will ultimately be best for emerging markets and commodities. It will be bad for the S&P 500, which has attracted money as an alternative to cash and government bonds. Rising inflation would force capital out of equities, junk bonds and government bonds (all of which are at all-time highs) and ultimately into precious metals and commodities.
As for precious metals, we maintain that a major bottom has been reached and the next move is likely higher. It could initially come on the back of these rate cuts and increasing speculation in the equity market. The mining equities are sold out and refuse to go any lower and its only a matter of time before a relief rally begins.
Good Luck!
Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.