By Neland Nobel

Written by Neland Nobel

Estimated Reading Time: 6 minutes

New readers may have to go back to the archives to fully absorb the thread of these comments. See January 28, May 2, June 9, and June 18.

The quick summary is that we looked for gold to peak earlier in the year because of its excessive parabolic action (gold bullion hit $5,600 per ounce on January 29^th, the day after our report), and that corrections after parabolic moves can be large and painful. The greater the upside excess, the bigger the pendulum swings during the corrective phase.

However, we felt this was a healthy correction within the context of an overall bull market because central bank purchases, government fiscal and monetary excesses, and the search for non-dollar reserve assets would preserve the longer-term trend.

Later, in our piece on June 9th, we showed that the correction was within historical norms and that returns after the market falls below the 200-day moving average have consistently been good.

We hope readers appreciate that technical analysis is not science, and that in the short term, markets can do surprising things. This can be especially so with the gold market, which, because it has no earnings, makes conventional fundamental analysis more challenging.  In addition, since governments and central banks are involved, you have players who can act in relative secrecy and whose actions are only later revealed.

It would be fair to say that fundamentals move the markets in the longer term, over years, but that market psychology and capital flows are more influential in the shorter term. The value of technical analysis is that it can tell you something is going on, even if there has not been a shift in fundamentals.

On that last point about central bank buying, the World Gold Council continues to report that central bank purchases have been robust and that central banks have underreported their purchases.

How much have they underreported? WGC reports that it has captured about 22% of actual purchases, implying buying is 4 to 5 times higher than reported!  Others suggest it could be worse than that, by a factor of 15. That is a stunning revelation.

Apparently, reporting to the IMF is “voluntary,” and only by looking at actual deliveries and refinery data was this discrepancy discovered.

That data further supports our long-term view, but our short-term market call is now being tested.

We suggested a low in June, with likely upward turn after the 4^th of July holiday.  Further, we thought the market would at least test its 200-day moving average, or perhaps a bit lower. It did.

Markets often go through a fairly predictable sequence.  They peak on excessive momentum and sentiment, fall through the support of short-term moving averages, and gravitate towards long-term moving averages and Fibonacci retracements.

Near the bottom, sentiment should be very bleak and momentum very oversold, almost a reverse mirror image of the conditions at the top.

Then you want to see “divergences” in the technical data.  Typical examples would be a market forming a double bottom, with the last bottom slightly lower.  However, on the second bottom, you likely will see momentum indicators like Relative Strength or MACD not go as low as before.  This signals downside momentum is running out of power.  Momentum not confirming the price action is the divergence we were looking for.

Then you would like to see reversal signals, and finally you want to see scattered buy signals.

On June 9^th, we provided a list of items from our “bottom confirmation checklist” to help prospective buyers track their progress.  We mentioned that we did not think we were quite “there yet”, but a June low was likely, and things looked to turn to the upside after the July 4^th break.

We hope readers appreciate that such specificity leaves us open to looking like idiots if things don’t turn out that way.  When you put opinions in print, there is no place to hide. But on the other hand, analysts and prognosticators who write vaguely and with a lot of qualifiers are not of much use, are they?  We would prefer to call it as we see it and let our readers, who we believe are intelligent, weigh this advice.

The best that can be done with the tools available is to prepare the investor to buy a “zone of value” if they are so inclined, and not to expect exact precision from any financial writer.

The low for gold was $3942 on June 30^th, right in line with our expectation before July 4th.  Further, the price retreat is remarkably close to a 50% retracement, whether the low of $1809 or $2536. Such 50% retracements, and even .618 retracements, are common in big corrections.

Note that on the second low, RSI (top panel) and MACD both show divergences (they did not go to new lows when the market made a lower low). It is a little easier to see in the exploded panels on the right.

MACD looks to be turning upward, and we have had some decent signals on our list be fulfilled, such as the 10-day exponential turning up and some nice white candles.

We mentioned that because the gold shares tend to lead, we would expect to see buy signals there first.  We now have formal point-and-figure buy signals on the major ETFs, GDX and GDXJ, and we also see them on broad indexes like HUI, the Gold Bugs Index.

Why do gold mining shares tend to lead bullion out of a bottom?  Basically, above-ground bullion, if marked to market, is worth about $29 trillion.  The total market capitalization of the gold/silver mining sector is a little over $1 trillion.  Such a smaller market cap makes initial capital flows easier to move price, and the mines have operating leverage, which makes them more sensitive as well.

That is why actual buy signals on the mining shares are important at this stage.

GDX generated a point-and-figure buy and a double-top breakout on July 2nd.

In addition, Sentimentrader OPTIX has turned upward, and the Bullish Percentage from Stockcharts for mining shares has risen from the incredibly low reading of 0 to the mid-20s.  The latter would indicate some breadth or broader participation in mining shares.

These are very specific criteria we mentioned on June 9^th.

So, a lot of what we wanted to see is happening within the projected timeframe.

Additionally, we would like to see the low hold, and the market pass above the 200-day moving average and hold there for at least a week or so.  We need to contain any retreat and see a series of rising bottoms.  Turning the 21-day and 50-day moving averages upward would also be desirable.  But the time the 200-day starts to turn upward, a good deal of the recovery move could be behind us.

Getting above $4350 in the next few weeks would be an added positive indicator.

We would NOT like to see a sharp rise, and the move abort, canceling recent reversal and buy signals, cause MACD to turn back down, and break down to another new low.  Rather, a quiet recovery, turning indicators positive, putting in a series of rising bottoms, is what we would prefer to see.

And very briefly, silver has gone through an even more severe correction and is slightly behind gold in the bottoming sequence.

Having said all that, things do seem to be lining up remarkably well with our call for a June low and a better second half of 2026 for precious metals.

How many signals does one need before acting?  No one signal is sufficient.  Scaling in with multiple purchases as long as things progress as described may be the safest course of action.  There is no single indicator that will always work.  It is better to rely on the preponderance of evidence and have one charting method confirm another.

All of this discussion is based on the assumption that the reader is interested in owning gold and that it is appropriate in your financial plan. Be sure to consult with your financial advisor before acting.

We think gold has considerable upside potential for the macro reasons we have cited.  A recent survey of wealthy “family offices” by UBS showed that most hardly owned any gold whatsoever.

That report gave us considerable comfort.  We want to avoid investing in a financial mania, but it is hard to have one if the investment in question is hardly owned by the public.

-Neland Nobel

Neland ‘Neil’ Nobel was born in Uniontown, Pennsylvania, and moved to Arizona in 1961. He attended ASU and earned a B.A. and an M.A. in history, with a specialty in economic and military history.  He graduated Summa Cum Laude and received a Richard M. Weaver Fellowship from the Intercollegiate Studies Institute.  He spent the next 45 years in the financial services industry, ending his career with a 25-year run with UBS as a portfolio manager and Certified Financial Planner. In retirement, he remains active, having founded the Prickly Pear in 2020 and continuing to contribute content.  In his spare time, he is a certified firearms instructor and runs a hiking club and two shooting clubs.  He is married with three children and three grandchildren.

The author’s views are their own and do not constitute financial, investment, or legal advice. Investing involves risk; please consult with a qualified professional before making any financial decisions.

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Charts courtesy of Stockcharts.com.  All facts and data are derived from sources believed to be reliable, but their accuracy is not guaranteed.  Consult with a qualified financial planner or do your own research. This is not an offer to buy or sell securities and is offered solely for public education.

 

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