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Precious Metals Stocks -- A Bottom Finally Forms
By: Rambus | August 8, 2022

By Plunger

In this report I will advance the case that a bottom has finally formed in the precious metals market after a grueling two year bear market. First, I would like to review how the market got to where it is now. Then show the indicators in my gold bottoming system which support the case that a bottom has formed and then finally lay out a strategy going forward.

Genesis of the Bull Market- How we got to where we are

The precious metal stocks (PM) are in a multi cyclical bull market (secular) which started in January 2016. There have been 2 legs up and 2 legs down so far. The third leg up, which will likely be a powerful one, most likely began the third week of July 2022. I would expect it to last between 2-4 years.



Above we see the secular bull market so far. It began with a 7 month cyclical up leg followed by a 25 month consolidation. The next leg up lasted 23 months followed by what appears now as a 2 year cyclical bear market. I began classifying this most recent decline leg as a bear market in Feb 2021 when it was 6 months into the decline because it became evident that the moves down were NOT corrective but in fact distributive. Bear markets distribute positions from the informed to the misinformed (suckers). Until recently, most investors clung to the concept that it was “just” a correction. I think the 90 day brutal decline begun this past April, ends this argument. Clearly, it was distributive in nature, not just a correction.

The three series of indicators on the chart above show that this recent decline, in aggregate, was the most extreme pressure packed decline of this entire secular bull market since 2016. The rate of change (ROC) even exceeded the covid crash. The 3 indicators in sum exceeded all other declines. Market sentiment, Stochastic and ROC led to a full-on capitulation… more on that later.

Prior to this secular bull market the sector underwent a 5 year 85% bear market from 2011 to 2016. This cleared the decks of all the dead wood which is why the market was able to vertical launch in the first half of 2016. But this first leg was destined to disappoint, as it ultimately did, because it didn’t unfold like a “real organic” leg should. You know, majors first, mid tier second and finally juniors and green field exploration. No, everything blasted up together, so the market needed a prolonged shake-out to sort through the real stories vs the trash. It took two years to do this. Take a look how FNV did during this period vs NGD and you will see what I am talking about. The market was just doing its job.

Next was the bull leg from Sept 2018 to Aug 2020 where the GDX more than doubled. Covid slapped it down for only a month and then in its last 2 months from mid June to early August it got over heated. I exited most of my positions in early August 2020, however my biggest error was in thinking it just needed time to consolidate before resuming the upside. The red flag waving was the fact that silver accelerated in a vertical blow off. This always happens at the end of a bull market and this bull was now 2 years old. This all should have been obvious to a schooled observer of markets. I recall twitter posts made by silver bugs right after the top in August bragging about buying the first dip and listing the silver stocks they bought. Recall that when one is buying right it never feels good and bragging is usually the last thing one wants to do because he is scared. Knowing the signs were all there, the proper course of action would have been to completely fold ones tent and go on sabbatical. The weekly RSI of the silver/gold ratio peaked at 78 on 3 Aug 2020, which was a clear signal a top was imminent. When this high of an RSI reading is combined with the end game acceleration of the silver price the bull market is ending…it’s time to go fishing.

Recall the month of July 2020, it seemed surreal as silver just wouldn’t stop. Each day it powered higher. ridiculously higher. Here is a chart of Silver From Jun-Aug that summer, it was like bull markets are supposed to be, it was actually fun to be in a bull market. Silver essentially doubled in 2 months- crazy.



But keep in mind the old Warren Buffet quote that “A bull market is like sex, it feels best just before it ends”. That’s the voice that should have been in your head that summer.

Aug 2020-July 2022 The long torturous PM bear market

If you ever wish to study bear markets this has been a classic text book model. Investors refused to believe they were in a bear market until it was 80%-90% over. Bob Thompson has mentioned this phenomenon and we saw it play out. There were 3 to 4 BMR’s with each one getting progressively bigger. Gold bugs bought all the way down and got caught in all the post BMR sell offs. Finally, the last BMR (Apr 2022) sucked in enough investors to provide the fuel for a full-on, full-scale downside collapse which ended in complete capitulation after a 90 day, 50% decline. A classic ending bear market annihilation drive. It ended up being an honest to god full blown cyclical bear market. No, it was not a correction.

Let’s build the case the next bull market has now started

First off, if you are not familiar with Bob Thompson’s mining clock I highly recommend watching this video and signing up for his free clock updates. His comments on the mining clock start at the 40 min mark. Once one understands the concept and sees the timetable you should be able to see why we were not headed for a 2013 like gold crash. Simply stated that’s not where the market is in the clock cycle and the charts depict this.

The Capitulation

I have gone back and looked at all the cyclical PM stock bear markets since the late 1800’s. I have sliced and diced them and you know how long the average bear market was in the gold stocks? 24 months! That’s right, just where the market is right now. So this bear is ending on schedule. So think about what we have witnessed in the past 7 months and particularly 90 days. By mid December last year the juniors had been thoroughly trashed by tax loss selling. It was a particularly brutal catharsis because many investors had big gains in big tech and really needed to offset those gains with something. PM junior portfolios served as an offset to those tech profits and they got pummeled, beaten with a stick. And here is the thing, they never really bounced back in the new year. Once the March BMR peaked in April the market began its annihilation drive, taking stocks down 50% in 3 months. By June another unthinkable wave of selling hit the juniors to the point of total destruction. This was full blown capitulation in the junior sector, there was no longer any doubting if capitulation was here. Then mercilessly the bear went after the only thing left, royalties & majors, It didn’t matter if it was quality or not…. AEM, FNV…offered no quarter. As if the bear wanted to make a final statement or put a cherry on top of his accomplishments, then came July 25th, NEM earnings day. A total wipeout of the largest, most respected miner in the world, down 13% on the day after already losing 41% over the past 90 days. This was full capitulation of the highest order among the big caps, massive volume with an institutional exit of the sector. Full spectrum sequential capitulation in both sentiment and price action.

Think about all of this for a while then ask yourself what more do you want to see? Sure we see inverted H&S objectives for GDX as low as 12, but there is a H&S pattern behind every tree. Do you really think every last bearish objective will be achieved…. seriously?

As Rick Rule said to me recently after I had asked if one of my favorite stocks had bottomed he said “I don’t know, but sometimes it’s just cheap enough”.

Plunger’s Gold Bottoming System Charts



Above we see the gold miner sentiment indicator with the GDX overlayed and the weekly stochastic below. The vertical dashed blue line is drawn when fast stoch crosses slow to the upside. Simple chart and easy to see this is a buy point, but often overlooked. Look how stretched to the downside sentiment was and how long stochastic was flatlined. Also RSI reached the full extension of 29 which is really oversold for a weekly in a secular bull market. It was past due to turn up and it did. A buy point.

BPGDM- Daily Version

Here is a zoom in on the daily version. Here is the bottom buying criteria: when the BPGDM breaks up through the moving averages and the 5 day crosses above the 8 day it triggers a buy. This occurred on 27 July.



Gold Miners Above The 200 EMA

This was a very useful chart in the bottoming process. You can see how stocks above the 200 EMA were zero for the longest time. This showed just how extreme this downside move was. Mathematically, it can’t stay down there forever as moving averages begin declining so I drew the vertical line when stocks first hit 0% above 200 EMA. You can see the current sequence was the longest. Note that it took 6 weeks after stocks hit 0% before the GDX began to rise. In the previous 3 sequences the longest was 2 weeks. Another measure of extreme downside compression.



New High/Low Percentage

Next let’s turn to both the weekly and daily new high/low percentage. Truly extraordinary, as both exceeded the extremes of the covid crash. On the weekly, up to 50% of stocks hit new lows in the worse week of 27 June. The daily shows 65% of stocks hit new lows on the worse day of 14 July. That’s more than the worse day of the covid crash. Extraordinary high compression lows. This gives spring-back power once the next bounce breaks out.

Weekly



Above: note weekly stochastic curling up now. Expect price acceleration once the 20 level is reached.

Daily



Above: A massive 2-month cluster of new lows reaching 65% in a single day, setting up a compressed spring.

Bollinger Bands-Gold

Weekly:

You can see that gold had a 3 week excursion outside its lower Bollinger Band. That is fairly extreme in the context of a secular bull market and indicative of a near term upside reversal. The bands are now widened out from the big downside move. This is another measurement of downside compression likely leading towards a strong reversal.



Monthly BB:

The monthly confirms the concept that this is not 2013 all over again. Note how in 2013 gold ripped down through a declining BB and stayed outside for 4 horrendous months. That’s bear market action indeed. Contrast that with the recent poke below a flat BB. It was like a beachball underwater, it couldn’t stay there and popped right back up. that’s encouraging, however the indicators below make it clear that any bottoming action is going to take a lot of time before a sustained bull market move.

Stochastic and MACD are still in downward configurations so it’s going to take time to reverse this still existing downside momentum. It means there is still an undertow to the market and backing and filling will be the result of it. Don’t expect a steady upside path.

Note however, the BB width indicator. This shows the BB have narrowed to a minimum width indicating a significant move in price is fairly imminent on a monthly basis. If the move is to the upside it would result in the Stochastic and MACD making the turn and support an eventual prolonged move up.



GDX volume and extreme downside compression

This chart below shows in no uncertain terms how compressed GDX had become. First off 10 week average volume is shown by the thin red line overlaid onto price. It is a magnified and shortened scale of the thin blue line over the volume bars. This shows how volume has dried up over the past 2 bear market years. This is what we expect to see in a bear market. The recent up-curl could be the end of this trend.

RSI: I drew vertical lines through the low points in RSI showing where they intersect price at those lows. The recent low of 29.72 is very oversold on a weekly basis.

MACD Histograms: The most extended to the downside of any time in this 7 year secular bull market. More compressing of the spring.

Stochastic: Not a spike low but of longer bottoming duration and now turning up. Breaking through 20 provides confirmation.

ROC: Even exceeded the rapid covid crash



Again, this is all a picture of extreme downside compression of the GDX for a considerable length of time. It is why I expect more upside follow through in the near term. Compressed energy is now being released.

HUI/Gold Ratio

The HUI/Gold ratio is a validation of sorts of an actual bull or bear market in the gold sector. During prolonged uptrends in a bull market gold stocks will outperform gold. It does tend to lag a bit so this chart is telling us we are almost there since the indicators are now reversing. Again we see a picture of extreme extension of the indicators.



The below chart shows this same dynamic with gold and GDX plotted together. You can see the metal is still leading the stocks. This should eventually change.



Gold Miners Adv/Decline Volume

Adv/Decline lines typically lead stock prices, however in the gold sector it doesn’t have this history. It actually tends to lag the GDX and you can see it doing so here. But it is showing signs of a bottom in the Stochastic and PPO indicators, as well as the Adv/Decline line itself.

The 21 posted on the chart is the H&S price objective of the GDX. It may or may not ever achieve it, however the NL shown may be a magnet for a GDX back test which comes in just over 29 where another measured move method is projected for this current rally.

Overall despite being a lagging indicator in GDX the Adv/Decline Volume is a slight positive now with indicators turning upward.



SIL/GDX- Silver stock to gold stock ratio

This is a significant meaningful indicator because it only makes major swings and shows when an upside bull market gets in gear. This is because silver stocks outperform gold stocks once the uptrend is well underway. It has already turned upward after a positive confirmation double bottom. The early turn upwards, I believe, is telegraphing that silver stocks are going to far out run gold stocks in this upcoming bull market. It’s my opinion that this will be due to the Comex silver suppression scheme coming unraveled...



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