Gold and silver prices ran out of
momentum during the first week of July
and have been drifting lower ever since. A
deeper correction seems like a realistic
expectation, but precious metals are
showing strong signs of resiliency. Here
are seven forces that should be creating
headwinds for precious metals, but are
barely having any impact.
1) Increased Margin Requirements – The
CME raised margin requirements in the
futures market for both gold and silver
during July. Raising margins makes it
more expensive for paper speculators to
keep their positions. This type of increase
in margin requirements often results in a
sharp and sudden drop in the price.
2) Futures Expiration Approaching – The
expiration of the futures contract is
coming up on July 27 for gold and July
26 for silver. There is a fairly strong
historic pattern of gold and silver prices
dropping sharply just prior to expiration.
Many believe paper manipulators use
leverage, false bids and employ other
tactics to send prices tumbling so that
they can cover and profit from their short
positions.
3) Bearish Commitment of Traders
Report –  The COT showed that
speculative gold longs decreased their
positions for the first time in more than a
month, while shorts increased their own
positions for the third week in a row.
Short positions by commercial traders are
near record levels and almost 2.5 times
their long positions. We will get a better
picture when COT data is released on
Friday, but the expectation is that this
trend continued throughout the most
recent period.
4) Declining GLD Inventories Suggest
Profit Taking – The GLD ETF has
accelerated, especially by speculators and
traders that have generated huge profits
in the first half of the year. They do not
have a bullish long-term view of the
precious metals market or any
philosophical reasons to be invested.
They do not fear a crash in the stock
market or dollar crash. They just bought
the momentum and now that the
momentum has slowed, they are likely
cashing out. This is certainly evident in
the declining GLD ETF inventories over
the past few weeks.
5) Brexit Fears Fading Fast – Brexit
dominated headlines following the
unexpected ‘leave’ vote from the United
Kingdom. Analysts were predicting gloom
and doom, but financial armageddon
never materialized. The decision for the
UK to leave the EU helped to push the
gold price higher in the short term, but
investor concerns about the impact of
Brexit and demand for safe haven
following the vote have been muted.
6) Rising USD Index – The dollar is
rising. In fact, the USD index has
strengthened from 92.62 to 97.26 in the
past two months. It is currently at 97.46.
This is usually a bearish sign for gold and
silver, but the inverse relationship can
break during strong bull markets.
7) Weak Seasonal Months – June and
July are typically two of the worst
performing months for precious metals.
In order, they are June, April, March and
July.
Gold Shows Remarkable Short-Term
Strength Despite Headwinds
Despite all of this, the gold price is down
just $55 (4%) from its 2016 high to
$1,320. Silver is always more volatile,
typically rising faster than gold and
falling faster as well. The silver price is
down $1.65 (7.7%) to $19.58, after its
brief spike above $21 shortly after the
July 4th fireworks.
It is important to note that both metals
remain above prior technical resistance
levels that will ideally turn into support.
Gold must hold above $1,305 and silver
above $19.28. As long as they remain
above these levels, our bullish
outlook remains intact.
The underlying signals of strength are
even more potent for mining stocks. The
mining stocks index has offered leverage
of more than four times, advancing 110%
vs. gold’s advance of 25%. Yet during the
pullback of the past two weeks (gold -4%
and silver -8%), the mining stocks index
is down just 3%. Leverage to the upside
and protection to the downside? I’ll take
that risk/reward mix any day.
It is entirely possible that gold and silver
prices continue slipping in the days
ahead, especially with futures expiration
around the corner. But the mildness of the
pullbacks witnessed thus far in 2016 are
a testament to just how resilient gold has
been.
When the price corrects, buyers are
stepping up to buy the dips aggressively,
rather than panic out of their positions
and hasten the slide. There is a certain
conviction amongst gold investors, for the
first time in nearly 5 years, that gold’s
new bull cycle is just getting started.
Despite all of the bearish short-term
headwinds mentioned above, gold is
benefiting from becoming very oversold
and undervalued at the end of 2015. It is
also benefiting from significantly reduced
expectations of how fast and far the
Federal Reserve will raise interest rates.
Physical demand remains robust, both
from central banks and investors.
While Brexit didn’t lead to an immediate
economic crisis, European banks remain
highly leveraged and at risk of a collapse,
geopolitical tensions remain high, terrorist
attacks on Western targets are increasing,
currency wars and escalating and Asian
wealth is attempting to escape capital
controls as China’s economy cools.
Stock markets are flashing overbought
signals from a variety of different data
points, which increases demand for safe
havens such as gold.
Lastly, look for a contentious and
unpredictable election season in the
United States to be supportive of the gold
price. ABN Amro recently suggested that
a Trump presidency could push the gold
price at least $500 higher.
We are heading into the best performing
season for precious metals and all of
these above elements combined suggest
that prices are likely to continue higher
after the current pullback bottoms. While
mining stocks have experienced an
incredible run in 2016, they remain
undervalued relative to the metals and
should continue offering strong leverage
for quite some time.
Therefore, we believe that all dips should
be used as buying opportunities. This is
easier said than done, as most investors
are too fearful to buy the dips and end up
buying near tops. Instead, successful
investors muster the fortitude to buy when
everyone around them is selling and there
is blood in the streets. This is the
contrarian mindset that we employ at
Gold Stock Bull and it has helped us build
a portfolio of mining stocks that are up
over 100% year to date.

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