Technical outlook on gold, silver and oil, as well as the stocks related to these commodities. My primary focus is on stocks related to these commodities, since I hold several gold, silver and oil stocks in my portfolio. I will be looking at the commodities themselves as well as some ratios that show how the stocks are performing relative to the commodities.
Gold is still looking okay, but not ideal. After the strong run that started in 2016 I expected a large pullback (we had that in late 2016) followed by another rally above the 2016 high. My original target was $1525, at which point I would have been looking to get out all my gold-related stock trades. We have had a few issues though. Mainly, gold has been moving up in 2017, but by historic standards (when we have had similar patterns like this play out in the past), the price movement is very weak.
The gold weekly chart shows the first rally, followed by the pullback, and we are now in an overall upward trajectory again. But this time we are moving slower (notice the angle of ascent on this rally is much shallower–these are regression lines) than we were in 2016, which isn’t ideal.
A weak gold rally is typical when the gold stocks aren’t leading. Gold stocks are much more volatile than the commodity, and will often advance or decline significantly more than the actual metal. When gold is rallying strongly we tend to see gold miners surging higher. When gold miners are stagnant to declining, it shows that the gold rally lacks legs.
The next charts shows the ratio of the gold miners index (GDX) compared to the gold EFT (GLD). We can see that recently, even though gold has been edging higher, the ratio is stuck moving sideways. It was for this reason I opted to liquidate some of my metal stocks that were not performing as well. Until the whole industry–that is, mining stocks in general–start to rally, there is a danger that they could see significant declines if gold starts droping again. Also, until that ratio starts moving up (breaking out of that sideways pattern), gold isn’t likely to make a strong surge higher. The rule of thumb is that ideally you want to this ratio and the price of gold moving in the same direction, in order to help confirm the trend direction in gold.
Silver is weaker, and that is problematic for both gold and silver. Typically, when metals are strong we see silver outperforming gold. Recently we have seen silver turn lower, and it looks like it could drop further. The lines on the chart are regression lines, or “lines of best fit”, and are a quick way to show the typical angle of ascent/descent over the course of a price wave. Since many miners not only mine gold, but also silver, silver weakness was another reason I recently thinned some of my stocks positions in the metal space.
Interestingly, silver stocks, as represented by the Silver Miners Index (SIL), have started to turn higher, relative to the silver ETF (SLV). Once again, for a strong rally in silver to develop we want the SIL / SLV ratio to be moving up. Currently this ratio is stuck moving sideways, but an upside breakout would be favorable for a rally in silver (and by extension gold). If the ratio starts dropping again, that typically means weaker silver prices. Notice how strongly this ratio lead silver higher during early 2016.
I am still holding onto a couple metal stocks that are performing well, because if we do start to see those ratios improve (which would mean most of the metal-related stocks are moving up) these strong performers could soar even more. On the other hand, I had to cut the weaker performers in light of the weaker movements recently, because if those ratios start dropping then most metal stocks will get hammered. Gold is still moving okay (but not ideal), but with ratio weakness and silver weakness, the outlook is no longer as bullish as it once was…at least not at the moment.
Oil hasn’t done much recently. Long-term I am still slightly bullish, but based on the recent price action, it could be quite awhile before we see $60+ oil. Recently oil entered a descending channel within a larger range. The price of oil falling to $44 or $40 isn’t out of the question, and wouldn’t change the overall outlook–we are still moving in this bigger sideways channel. I am more cautious now though, and have liquidated a good chunk of my oil-related stocks, mainly because we had that attempt in December through February to break higher, and it didn’t happen. When a breakout fails, that is a not a good sign, and the price has been falling since.
The pattern that played out in 2016 has typically been very bullish for oil in the several years that follow (when this pattern has occurred in the past). That hasn’t played out here, so instead of trading a high probability pattern, this has become more of a gamble, which I don’t like. That is why I have exited a good chunk of my oil-related positions. I am holding onto a couple of the strong ones incase some strength returns to oil, but have placed stop loss orders on all my positions in case oil continues to deteriorate, which it well could.
I don’t know what is going to happen here. We have some bullish arguments and some bearish arguments, and right now the price is in the middle of the big range. It could fall to the bottom of the range (or below), or it could rally back toward the top. Until we get some more definitive movements, I prefer to not be heavily involved. Based on what I do see, in the short-term I expect more weakness into the $44 region, and possibly $40. Over the longer-term I expect that $55 region to be re-tested and likely surpassed, but it could be months before that happens.
In this type of situation I always feel the best thing to do is thin off the weakest positions in the portfolio (related to the commodity), and make sure to protect the profits in the strong performers (but no reason to get out just yet if they doing performing well). We are still working off that rally in 2016, which signalled the start of a likely long-term uptrend. But by historic standards we should be further along than we are. A lot of oil-related stocks are weak, which also isn’t ideal, so it is worth treading cautiously. The nice thing is that since many oil stocks are so weak right now, if the outlook does improve they can likely still be bought/repurchased at decent prices…but not quite yet.
By Cory Mitchell, CMT