Gold’s Volatility and Other Things to Watch

Gold’s reversal from $1130 to $1200 combined with sharp rebounds in the gold miners has given precious metals bulls some hope that the bottom may be in.

Gold’s reversal from $1130 to $1200 combined with sharp rebounds in the gold miners has given precious metals bulls some hope that the bottom may be in. A few weeks ago we noted that the sector was extremely oversold and a snapback rally could begin. Gold has been the tell for the bear market and a real bull market throughout the precious metals complex may not begin until Gold’s bear has ended. In this editorial we dig deeper into some things to watch as they pertain to Gold.

First we will focus on Gold’s volatility. The chart below shows Gold and two volatility indicators: the CBOE volatility index and average true range. Peaks in daily volatility have coincided with important peaks and troughs in the Gold price. Volatility declined from summer 2013 through summer 2014 before perking up as Gold declined from $1255 to $1130. Yet both volatility indicators are not close to extremes. Volatility does not necessarily need to reach an extreme to signal a bottom. However, the two biggest volatility spikes were at the 2008 bottom and 2011 peak. A sharp decline in Gold below $1100 towards major support combined with a spike in volatility could signal a major turning point.

I’m also focusing on the COT as its an excellent sentiment indicator. By some metrics (objective and anecdotal) Gold’s bear market has reached extreme territory. However, the COT is presently not at an extreme. We plot (as a percentage of open interest) the net speculative position and the gross short position. If these readings can exceed the 2013 extremes then they would be at 13-year extremes. A spike in the gross short position, while negative in the short-term provides future fuel (short covering) for a very strong rebound off the bottom.

Meanwhile, let’s not forget Gold’s relative strength. We shared the importance in a recent missive. We noted Gold’s relative strength tends to perk up before Gold itself bottoms. The chart below plots Gold against a foreign currency basket (the inverse of the US$ index) and Gold against the S&P 500. Gold is holding up well against foreign currencies but is coming to an inflection point. I don’t think its going to breakout yet but I could be wrong. Meanwhile, Gold continues to be very weak against the stock market.

Gold has been the tell for the bear market and my work leads me to believe the bottom is ahead and not behind us. Last week we noted the likelihood of a test of major support near $1000/oz rather than a bottom at an arbitrary level. In addition, Gold has yet to have a volatility spike on par with the spikes at the 2008 bottom and 2011 top. Moreover, current positioning in the futures market remains below the extremes seen in 2013. Finally, Gold has more work to do on the relative strength front before it can sustain a recovery.

All this being said, it is important to keep an open mind to various possibilities. Silver and the mining stocks are totally bombed out and we should pay close attention if they retest their lows. The weeks and months ahead figure to be enticing and exciting for precious metals traders and investors. Expect quite a bit of day to day volatility as we see forced liquidation and occasional short covering. Be patient but be disciplined. As winter beckons we could be looking at a lifetime buying opportunity. I am working hard to prepare subscribers.

By Raphael Thurber

Raphael Thurber is a respected resource writer and editor. A graduate of the College of William and Mary, Raphael is a longtime contributor to Yahoo Finance, with an interest in resource and investment journalism that spans over 10 years. As Editor of MiningFeeds, Raphael is responsible for assuring that the site remains a valuable knowledge resource for those in the mining sector.

If you would like to receive our free newsletter via email, simply enter your email address below & click subscribe.

MOST ACTIVE MINING STOCKS

 Daily Gainers

 Australian Mines Ltd. AUZ.AX +900.00%
 Adex Mining Inc. ADE.V +50.00%
 Casa Minerals Inc. CASA.V +30.00%
 Rare Element Resources Ltd. REE +26.63%
 Astro Resources NL ARO.AX +25.00%
 Tearlach Resources Ltd. TEA.V +21.05%
 MacDonald Mines Exploration BMK.V +16.67%
 GME Resources Ltd. GME.AX +16.67%
 Standard Lithium SLL.V +16.42%
 Black Iron, Inc. BKI.TO +16.28%

Download the latest Solaris Resources (SLSSF) Investor Kit

You have successfully subscribed to the newsletter

There was an error while trying to send your request. Please try again.

MiningFeeds will use the information you provide on this form to be in touch with you and to provide updates and marketing.