Early this year I expected important turning points for precious metals. This was primarily based on a long term USD analysis. Precious metals have turned quite bearish in recent months suggesting long term secular tops have been seen in the metals. While this is still likely the case, a 4 year cycle low for the sector is due and I believe we saw it mid-May. A retest of recent highs for the metals is always possible as the very long term cycles are still pointing up. I believe we are at the same point in the commodity cycle as the late 1940s, however I’ll leave that discussion for a future post.
I follow the gold miners via the HUI index, the Amex Gold Bug index, a basket of global gold mining stocks. I have tracked this index for many years and I believe the cycles for the gold miners are different from stocks or equities in general. Large cycles such as the Hurst 4.5 and 9 year cycle periods for stocks are slightly shorter at roughly 4 and 8 years for precious metals.
The metals and the miners are due a 4 year cycle low, which is the mid-point of the current 8 year cycle. There was a chance that this low arrived last summer, however the 4 year cycle has extended and is forming now at 55 months. In 2004 and 2005 the 4 year low formed as a straddle and there was a possibility this would happen again between last summer’s lows and this point in time. The sector turned very bearish early this year and the 4 year cycle likely arrived with the recent May lows. I ran an analysis with Sentient using the ICM setting and I have bravely pinned the 4.5 year low to mid-May.
There are many signposts that the 4 year low is forming based on sentiment, COT analysis, etc. What we need now is price action to confirm it. A bullish cycle for this sector is a rally for 3 weeks and a pullback into a 3.5 week low, then new highs into at least the 4th or 5th week. We should note that since the September 2012 highs, the HUI has not put in a higher weekly close beyond 3 weeks. We need to see this change before we can be confident a change in trend is occurring.
A 3.5 week ( 18 – 20 calendar days) low is due today IMO, and a new high this week which exceeds the April 25th high would be the first real sign of an important bottom for the HUI. If this occurs, I would still expect a pullback into late June which would mark the 7 week cycle low. If we do not see this type of price action, the status of the 4 year cycle will be in doubt.
Looking further out, the rally that we are likely to see from a 4 year cycle low will be impressive, and will likely surprise many later this year and next. If history repeats, the gold miners may under perform, but both gold and silver may put in new highs next year or beyond.
I like to look at the 9 year FLD for marking important future highs. It has done a terrific job since the start of the gold bull in 2001. I’ve highlighted 3 important points in time and I will be very curious to see where we are in August, then Q1 2014, and finally in Q4 2015.
While I am bullish the precious metal sector, we need to see confirmation via price action in the coming week or two.
Price action has yet to confirm