Gold and Gold stocks have fallen to levels from which we should see excellent returns over the next 12 months and potentially spectacular over the long term. However, that does not mean a bottom and reversal are imminent. Concerning the gold stocks, the indicators are extremely oversold and have reached levels similar to the 2020 and 2018 bottoms.
You rarely hear a technician say this, but whether markets make an oversold bounce or the actual bottom depends on fundamentals. Concerning precious metals, Fed policy changes have been quite significant. In late 2018, Gold and gold stocks rebounded and sustained gains around the time of the Fed’s last interest rate hike. The Gold breakout in 2019 occurred when the Fed cut interest rates for the first time in over a decade.
The Covid crash low occurred as the Fed cut rates to 0, and the market sensed massive fiscal stimulus and transfer payments. In 2008, the Fed cut rates to 0 a month before the October bottom. I could go on, but you get the point.
Gold and gold stocks are struggling because the market continues to anticipate rate hikes through the end of the year. When the market and economic outlook force the Fed to stop, Gold and gold stocks will rebound violently if they remain extremely oversold as they are now.
Before we get to the breadth indicators, let us focus on price. The weekly candle charts for GDX (NYSE:GDX) and GDXJ (NYSE:GDXJ) are below. After 12 weeks of decline, the miners are sporting bullish hammers. They could rally for at least a few weeks.
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