Sorry King Midas, but nobody cares about what you touch anymore. That shimmery stuff you melt down to make rings and things has lost its luster. Gold was the talk of the town around $1,900 an ounce but since the collapse in prices now it’s an afterthought. Which to me is baffling. I think that the real reason gold prices are not that high is the same reason people think that gold should be high. It’s all the “worthless” fiat currencies of the world. Globally we are printing money and devaluing currency.
So the only thing on Earth that should be worth any money is a hard asset like gold, right? Sounds good in theory. But who are the major players in the gold market? Who buys the most gold? Central banks do. So now if your currency has depreciated then guess what you can’t do? Buy as much gold as you used to. And the cycle continues…
I am not bold nor crazy enough to come out and say that the tough times are behind us for the precious metals. I do, however, offer up a couple of charts that may change a few minds. First take a look at the gold chart using the exchange traded fund SPDR Gold Shares (GLD). From the October 2012 relative high near $175 we can draw a trend line channel across the first few tops. This trend was broken to the downside in April 2013, rendering these trend lines obsolete for the time being. Just for giggles though, let’s extend these through today. More on this later.
Now let’s fast forward to price action since September 2013. We can draw another channel coming down across the tops through January 2014 only to be violated at the beginning of February by continued bullish price action. This technical picture looks a lot different given this new set of circumstances. The chart changes from a downward death spiral to dead cat bounce with a side of optimism. Price sits above the 25×5 SMA and, more importantly, above the most recent downward price channel. To quote the great Jim Carey, “So you’re saying there’s a chance!” The next resistance sits at the extension of the downward trend line from the October 2012 high.
You can’t talk gold without mentioning its hard-working, industrious, albeit less glamorous and attractive brother silver. On the charts silver and gold have a very high correlation. Economically this never really made sense to me as they have to very different sets of supply and demand determinants. Silver has industrial uses far above and beyond what gold has. Gold pretty much gets mined, shined, and showed off or buried. Silver is used to make all sorts parts from light switches to soldering applications to water purification.
Regardless of what theory suggests, the chart moves pretty much in step with gold. As such, the silver chart has nearly the same pattern as gold but has not had the breakout yet from the major trend line resistance. Here we use the iShares Silver Trust (SLV) and can see it trading in the $19 handle down from an October 2012 high in the low $30s and a far cry from the all-time highs seen in April of 2011 in the $48 range.
Gold has a relatively high correlation with many metals, not just silver. My thinking is that if we see a recovery in gold prices it will spill over to silver, platinum, copper, aluminum and a host of other metals to a certain degree.
Entertain my wild ideas for a minute here. What if the pundits screaming “Gold is dead” are wrong? What if gold has seen the worst of its decline? What if the recent price action is the beginning of a gradual recovery in prices and not a dead cat bounce? What if there was a way to profit from this crazy notion other than buying GLD or SLV?
If you have never paid any mind to the miners then you might like what you’re about to hear. By investing in a diversified mining operation we stand to make profits on a recovery in gold and silver prices but will still be insulated by exposure to other metals so it is not a “make or break” proposition.
Further, we can use the Zacks Rank to uncover mining companies that have had the most positive earnings estimate revisions. Given the fact that miners have been relatively beat up during last year’s market rally we have the chance to find a few real bargains.