The precious metals sector remains in a correction. The miners have shown some positive signs but are not ready to move yet because the metals likely have more correction ahead.
Technical support levels can provide us with low risk buy opportunities but combine that with sentiment data and we increase our odds of success.
One reason why the sector is stuck in a correction is because the net speculative position in Gold remains stubbornly high at 44% of open interest. Following interim peaks in the 2000s, the net speculative position usually fell to 30% and even 20% at times before Gold began its next impulsive advance.
We anticipate Gold will test $1400 and perhaps lower and that will clear out some of the specs.
Other sentiment data for Gold is more encouraging.
As of mid November, outflows in GLD reached their highest level since the December 2016 low. Judging from the outflows around the previous lows, Gold likely needs a few more weeks of outflows to signal a bottom.
As we noted here over three months ago, the 21-day daily sentiment index (DSI) like the net speculative position often declines to and below 30% during corrections within bull markets. Last I checked, the 21-day DSI was 38.5%. It has decreased from a whopping 84% but still has more room to fall.
Turning to Silver, we note a current net speculative position of 30% of open interest which is below previous peaks of 40% and 50%. During corrections within the bull market of the 2000s, Silver’s net speculative position often bottomed around 25%.
Elsewhere, the 21-day DSI for Silver is currently 63% which is stubbornly high. While Silver’s net speculative position isn’t extended, its DSI is.
Essentially, both the technicals and sentiment suggest the path of least resistance for Gold and Silver is lower.
We are looking at downside targets of $1400 and lower in Gold and roughly $16.00 for Silver. Should the metals test those levels, then sentiment indicators would reach more encouraging levels that could finally favor the bulls.
If and when that occurs, it could create excellent buying opportunities across the sector. Some juniors could bottom sooner while some could bottom around the end of tax loss selling.