Major Bottom in Precious Metals Could Occur This Week

Normally catching a bottom is not difficult. Bottoms tend to occur instantly while market tops form during a process. Yet, I’ve found that bottoms of long-term significance do not occur instantly. Like tops, they take time to develop. For example, think about late 2008 to early 2009. Commodities hit their price low in December but the bottoming process began in October and wasn’t complete until May. Emerging markets hit their low in November but the process began in October and ended in March. Returning to the present, I see that Gold and Silver look set to retest their late December lows. My work lead me to argue that the metals will successfully retest their lows and soon emerge from what in the future will be considered a major bottom in-line with 2008, 2005 and 2001.

I began with a daily chart of Gold which shows its daily closing prices and a volatility indicator. The percentage figure refers to the percent bullish reading from the daily sentiment index. As I noted recently, each bottom in Gold (except 2008) has come during a period of low and declining volatility. Volatility is currently at a 9-month low while only 7% of traders are bullish on Gold.

Next, let’s take a look at the current Commitment of Traders Report (COT) for Gold which shows the commercial short position and open interest at the bottom. The current commercial short position has reached a 3-year low while open interest recently touched a two and a half year low.

Moving to Silver, I see the metal is nearing significant support at $27. Silver closed at $28.93 and has a bit of room to fall before testing $27 and the 600-day moving average, which has been an important pivot point since late 2008. The current daily sentiment index is 16%. I think, with another day or two of weakness in Silver, the daily sentiment index would decline to single digits. I also want to note that $26 is the 50% retracement of the entire bull market.

Silver, unlike Gold, has seen more interest recently as open interest has increased since late last year. However, open interest would have to rise 40% to reach the old high. Commercial traders are net short 17.9K contracts, which is a within a whisker of the 10-year low which was reached at the end of last December. 

Consider these emerging fundamentals with technical analysis. Technicals always lead fundamentals and markets tend to look six to nine months into the future. I am not predicting imminent action from the Fed or imminent money printing from the ECB. However, I am noting the emerging positive developments which will drive precious metals higher into 2013. Policy from the east is shifting towards easy. Europe will have to embark on some major money printing likely by the end of the summer. Finally, continued weakness in US data along with the strength in US Bonds and the US Dollar will facilitate the environment for the next round of Fed action.

I anticipate a bottom this month to be followed by a higher low in July or August. The fundamentals should become more clear by the end of the summer and would drive the precious metals complex much higher during the seasonally strong period. Remember, major bottoms take some time to develop. I believe a bottom is at hand and that is why last week I began to scale into some positions.