Gold Miners Are Coming Alive

It seems that gold miners have come alive … finally.

Our most interesting observation of this week is that gold has traded flat for a couple of days but that gold and silver miners were rising significantly on those days. The first chart shows this week’s divergence between gold (upper pane) and gold miners (lower pane), as indicated with the green circle.

gold_2months_oct2015

We know that miners have a track record of leading the metals both higher and lower.

That being said, this week’s price action in the gold mining space could be of exceptional significance. The three key gold and silver mining indices (Barron’s Gold Mining Index, HUI Index, XAU Index) are all flashing the same bullish signals. The chart below features several indicators which are mainly sending bullish signals.

First and foremost, the bullish percentage index is at 100, after it reached 0 in July of this year. Next, relative strength sits exactly at 70, a critical level, as that mostly indicates that an asset is becoming oversold. Short term price behavior will tell a lot about gold’s secular trend.

gold_mining_index_oct2015

Note how buying and volume pressure are somehow disconnected from the other indicators. It is a minor negative, as a rally on increasing volume is the strongest signal possible. The ongoing rally is happening on moderate volume, but that is fine as long as volume is not decreasing during the rally.

We believe that the next direction after gold’s current ‘hesitation’ will have fundamental implications. This is gold’s third attempt this year to break through its 200 DMA. A successful breach would signal a confirmation that the precious metals bear market is in the process of turning into a bull market.

The key price level to watch for a confirmed trend change is $1,300 /oz which should be cleared with conviction. For now, gold miners are signaling that this is in the cards, if not in 2015 then with a high probability in 2016.

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