Gold and silver bullion and stocks in for a volatile ride

Investor’s Digest technical analyst Brian Hoffman says trading in gold and silver mining stocks is likely to be quite volatile until it is clear where the precious metal prices head from the mid-December levels. Gold and silver bullion prices will likely bounce around before support levels firm and a rally can unfold.

First, there was Brexit, with the United Kingdom voting to leave the European Union. The stock market was surprised, but quickly bounced back.

Then, there was the U.S. election result. Although the stock market was initially shocked, by the next morning, it had warmed up to the perceived reality that the change will produce a better environment than the current establishment could.

Time will tell, but the U.S. election is a testament to the state of discontent amongst Americans—they’re angry and divided in their opinions.

They certainly have a lot of time to share them. After all, 95 million Americans aren’t working and they aren’t all retired or otherwise content without employment. So much for the supposedly great U.S. unemployment statistics. Nonetheless, the stock market is happy—at least for now. But that mood could easily change after the U.S. election honeymoon period is over.

Break down from precious metals rising wedge pattern was ugly

In my Investor’s Digest article published last October, I mentioned the rising wedge patterns that have emerged over the past year in the price charts of the broader stock market. Those chart formations could have bearish implications.

A few months ago, the precious metal sector broke down from its rising wedge pattern. The result for gold and silver bullion and the precious metals mining stocks was ugly.

Back in that column, I warned that if gold prices failed to hold the US$1,300-an-ounce level, then a free fall to US$1,200 per ounce could quickly unfold. Two months later, approaching mid-December, gold bullion was trying to find support at US$1,160. Silver bullion experienced a similar, albeit larger, free fall.

However, silver prices generally make bigger moves than gold—both up and down. In this case, silver suffered more extensive damage than gold.

Should gold prices hold support near US$1,160 per ounce, and silver prices above US$16.50 an ounce, then a significant rally could unfold. In any event, gold and silver prices will likely bounce around over the next few months.

The pullback in gold and silver bullion caused the share prices of the precious metal mining stocks to undergo significant corrections, but they started to stabilize at key support levels in mid-November.

By mid-December, the iShares S&P/TSX Global Gold Index (TSX—XGD) was trying to find support around $11.50.

Last autumn, I had warned that a large correction in that exchange traded fund may be in order, perhaps to $12.50 a unit or even $11. Should the support hold for that ETF at $11.50, that could pave the way for a move sharply higher.

The precious metals miners’ share prices appear to have stopped dropping before the precious metals’ own prices, which bodes well for a near-term rally provided that gold and silver also hold their early-December lows.

In fact, the unit price of the XGD ETF has formed a falling wedge pattern over the past four months. This technical analysis chart formation often has bullish implications as the buying strength starts to overtake the selling pressure.

A falling wedge pattern tends to represent a healthy correction in a bull market. The damage inflicted to the share prices of the precious metals miners was massive. However, they did rise more than 140 per cent from November 2015 to August 2016 before giving up about 60 per cent of that gain.

In other words, year-over-year, the XGD ETF is up more than 50 per cent. Regardless, trading is likely to be quite volatile until it is clear where the precious metal prices head from the mid-December levels.

Support level breaches

The share prices of the gold mining stocks that I first profiled about a year ago have corrected, along with the rest of the precious metals sector.

The breaches of the support levels that I had mentioned in September triggered heavy selling pressure.

In mid-December, the share prices of Sandstorm Gold Ltd. (TSX—SSL), a gold streaming royalty company, and gold producer Alamos Gold Inc. (TSX—AGI; NYSE—AGI), were trying to find support at about $5 and $8, respectively. Meanwhile, Alacer Gold Corp.’s (TSX—ASR) share price is even more desperately trying to find support around the $2 mark.

The share prices of those three gold stocks need to stabilize before it is safe to hold any positions because they could fall further.

Rising wedge patterns

Back to the wedge patterns: the movements in the broader North American stock market indexes – as measured by the S&P 500 Index and the S&P/TSX Composite Index – are tightly wound up in rising wedge patterns.

Both of those stock market indexes have performed strongly during November and into December. Even so, a large downdraft is quite possible given the overbought environment, so watch your support levels very carefully.

Angst over the approaching inauguration of the next president of the U.S. may provide the catalyst for a wave of selling action.

Regardless, there are some key support levels to monitor. For U.S. stocks, key support currently exists for the S&P 500 Index around the 2,100 level, followed by the 2,000 to 2,030 range.

With Canadian stocks, if a pullback of any significance occurs, then the S&P/TSX Composite Index should find support around the 14,500 mark followed by the 13,800 to 14,000 range.

Brian Hoffman, CPA, CA, is a member of the Canadian Society of Technical Analysts. Based in Toronto, he can be reached at bk.hoffman@rogers.com. 

 

This is an edited version of an article that was originally published for subscribers in the January 6, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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